Latest Manufacturing Data Could Suggest a Rotation to Defensive Sectors

The first day of October gave investors news they might not want to hear, but serves as a warning that a rotation to defensive sectors could be the best move, which paves the way for a relative value exchange-traded fund (ETF) play for defensive equities over cyclical equities.

U.S. manufacturing Purchasing Managers’ Index from the Institute for Supply Management showed 47.8% during the month of September, which is the lowest since June 2009. Furthermore, September follows another contraction the previous month.

Analysts are primarily citing the U.S.-China trade deal as the main culprit.

“We have now tariffed our way into a manufacturing recession in the U.S. and globally,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

Trade negotiations between the two largest economies are set to begin later this month.

“Global trade remains the most significant issue, as demonstrated by the contraction in new export orders that began in July 2019. Overall, sentiment this month remains cautious regarding near-term growth,” Timothy Fiore, ISM chair, said in a statement.

The latest manufacturing data is another indicator that risk of a recession is growing.

“There is no end in sight to this slowdown, the recession risk is real,” Torsten Slok, chief economist at Deutsche Bank said.

With purchasing managers preaching doom and gloom, it certainly puts a damper on investor sentiment.

“Purchasing managers are telling stock market investors to get out,” said Chris Rupkey, chief financial economist at MUFG Union Bank. “Run. Run for your life. Get out while you can. The outlook is darkening and the thunder is growing louder by the day.”

Nonetheless, it gives savvy investors a chance to trade defensive equities over cyclical equities. The Direxion MSCI Defensives Over Cyclicals ETF (NYSEArca: RWDC) provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors.

RWDC seeks investment results that track the MSCI USA Defensive Sectors – USA Cyclical Sectors 150/50 Return Spread Index (the “index”). The fund, under normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in securities that comprise the Long Component of the index or shares of exchange-traded funds (“ETFs”) on the Long Component of the index. The index measures the performance of a portfolio that has 150% long exposure to the MSCI USA Defensive Sectors Index and 50% short exposure to the MSCI USA Cyclical Sectors Index.

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