One of the more surprising parts of the S&P 500s resurgence in 2016 has been the group of stocks leading the charge to new all-time highs. Ironically, it was dividend stocks and other defensive plays that were top performers in the first half of the year.
However, according to Credit Suisse analyst Lori Calvasina, the defensive trade may have run out of steam.
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She pointed out that falling interest rates were likely a key driver of the cyclical trade, along with contracting GDP forecasts in late 2015/early 2016 and lofty valuations among cyclical plays by the end of 2015.
However, after quite a run in the first half of the year, Calvasina now sees defensive stock valuations getting stretched while hedge funds remain underweight cyclical stocks. She believes these two factors could be grounds for a large rotation from defensive stocks back into cyclical stocks in coming months.
Some of the most problematic defensive/yield oriented groups on our work have been and continue to be Utilities, Food Beverage Tobacco, Food & Staples Retail, and Household & Personal Products (which we have been underweight), Calvasina explained.
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However, Credit Suisse also sees opportunities among cyclical stocks.
On the cyclical side, the most intriguing groups on our work include Transportation, Tech Hardware & Equipment, and Consumer Services, which we are overweight, Calvasina added.
Defensive ETF plays Utilities SPDR (ETF) (NYSE:XLU), Consumer Staples Select Sect. SPDR (ETF) (NYSE:XLP), PowerShares Dynamic Food & Beverage (ETF) (NYSE:PBJ) and Vanguard REIT Index Fund (NYSE:VNQ) were all up between 7.3 and 21.5 percent in the first six months of 2016. So far in the second half of the year, each of these defensive ETFs is down between 1.8 and 6.2 percent.
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