Can Service-Oriented Sector ETFs Continue To Do Heavy Lifting?


Might there be cause for some concern that the flattening in this price ratio is back? After all, if a bull market is healthy, one should anticipate the S&P 500 to experience more momentum than the world’s reserve currency. In contrast, when the large cap benchmark is declining relative to the U.S. dollar, safety and capital preservation are often more important to folks than capital appreciation.

Fed Fund Futures are currently projecting a 60% probability of a rate hike at the Federal Reserve Open Market Committee (FOMC) in December. Should it happen, chairwoman Yellen will emphasize service sector strength and downplay manufacturing weakness. The goal? Inspire investor confidence in the central bank’s decision making.

In truth, downplaying the difficulties in manufacturing and/or over-stating the strength of the services sector is a mistake. The rapidly rising costs/premiums associated with health care not only misrepresent the well-being of the consumer, but those costs/premiums reflect a diversion in spending at the pump. Does anyone expect health care costs/premiums to plummet the way prices at the pump have? For that matter, if energy prices creep higher, where will the consumer spending power come from? Not from borrowing… those costs are set to move higher. Not from wages… wage growth is going nowhere.

While our current allocation to stocks for moderate growth and income clients remains at 60% (mostly large cap, mostly domestic), and while our current allocation to bonds remains at 25% (mostly investment grade, entirely domestic), we’re still holding roughly 15% in cash. And while the 10-year treasury bond via iShares 7-10 Year (IEF) appears as though it might capitulate alongside a Fed hell-bent on leaving zero percent rate policy after seven years (if only to say that they did so), I would not be surprised to see buyers step in.

IEF 1 Year

Who would buy intermediate-term treasuries when 2-year yields recently hit 4-year highs?  Those that favor dollar-denominated debt over debt in faltering currencies. Those that see relative value where comparable sovereign debt is yielding less. And those that anticipate ongoing economic concerns where short-term yields rise in response to Fed action, while longer-term yields do not move appreciably. To wit, the remarkable stock market rally of October did little to alter the yield spread between “10s” and “2s.”

10 Year 2 Year Spread

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