- Even if the US economy and stock market are on the verge of severe pain after the recent yield curve inversion, some parts of the markets are going to do better than others, according to BAML ETF strategist Mary Ann Bartels.
- Based on market data since 1965, she writes that some sectors perform very well over the 12 months after the yield curve inverts, and one has a record of falling after every inversion.
- She’s advising investors which ETFs they can use to get the most profitable exposure to sectors that have tended to do well under these circumstances.
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Even if a recession is coming and stocks are headed for bad times, it doesn’t mean the entire market will suffer immediately — or that the pain will be equally distributed.
Stocks nosedived after a recent warning that the US economy could be headed for a recession. The yield on the 10-year Treasury note fell below the yield on the 2-year note, an "inversion" that signals serious fear about the economy’s health. It’s preceded the last seven recessions and hasn’t occurred since 2007, the year before the last economic meltdown in the US.
But it doesn’t mean a recession will arrive any day, and stocks often keep rallying even after the yield curve has inverted. Mary Ann Bartels, an investment and ETF strategist at Bank of America Merrill Lynch, says some parts of the market perform much better than others during those post-inversion periods.
Perhaps surprisingly, the energy sector is one. She says it’s been a big winner almost every time the yield curve has inverted.
"In the 12 months following each of the seven 2-year/10-year yield curve inversions since 1965, the energy sector has outperformed the broader equity market 80% of the time and by an average of 7.3%," Bartels says in a note to clients.
Energy companies have underperformed the rest of the market in recent years, and Bartels says that makes them something of a safer bet because they probably won’t suffer as much as other sectors during a broad downturn.
She advises investors to get exposure to the sector through the Energy Select Sector SPDR ETF, saying it stands out from other energy ETFs because of its lower expenses.
Bartels also thinks technology companies have a good track record at times like this. The pattern isn’t as strong as that of the energy sector, but she says that on average, they’ve beaten markets in the year after yield-curve inversions.
And she adds that if the yield curve’s "prediction" is correct and the economic cycle and bull market are coming to an end, that still bodes well for tech companies.
"Tech is the most globally exposed sector to the factors that perform the best at the end of bull markets — momentum and growth," she writes.
Bartels’ pick for access to the sector is the Vanguard Information Technology ETF for its low expenses, tight trading spreads and price momentum. She also says it has a bit less exposure to chips companies than other tech ETFs, and those companies are extra vulnerable to the ongoing US-China trade war.
But investors’ other favorite sector over the last decade doesn’t look nearly as good. She says consumer discretionary companies have done substantially worse than the rest of the market after every yield curve inversion since 1965.
"The average underperformance has been 9.1%," she writes.
For the brave legions who still want exposure to those stocks, she says the Consumer Discretionary Select Sector SPDR Fund is more liquid than its peers.
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