What's On Tap...

This week marks the start of the MLB playoffs and my Red Sox are aiming for their fourth World Series title in 13 years.  This year the Red Sox captured 1st place in the AL East after finishing in last place in 2015.  It’s been all or nothing for them over the last five years either finishing in first or last place:

2012 – Last place AL East

2013 – First place AL East and World Series Champions

2014 – Last place AL East

2015 – Last place AL East

2016 – First place AL East

This performance reminds me of sector performance within the S&P 500.  It is very common for a sector to be in last place one year and then in first place the next.  A look at the Callan chart below shows how the sectors have performed over the last five plus years.

Utilities (2011/2012), Financials (2011/2012), and Real Estate (2013/2014) show that sectors can go from the basement to the penthouse (and vice versa) in just one year.   Year to date energy has been the best performer after two last place finishes (like the Sox!). 

Fundamental factors will be the primary driver of a sector’s performance.  Oil prices dropping from $100 to $25 affect the earnings of energy companies and interest rates falling from 2.0% to 1.5% will make utilities a more attractive sector to those looking for income.  Market dynamics, specifically supply and demand, can take the performance further than the fundamentals warrant.  Investors will chase returns putting more money into the better performers and selling underperformers causing sectors to deviate from their fundamental value – either overshooting or undershooting.  This deviation will correct over time with sectors “reverting to the mean” and converging to their fundamental value.  The divergence from, and correction to, fundamental value is one explanation for sectors moving wildly in the table above.

This year consumer discretionary, financials, and health care are the bottom performers.  As our investment team evaluates opportunities in the market we are finding value in these sectors as they are being pushed below their fundamental value.  We are currently overweight financials and health care in our Dividend Income portfolios and overweight financials in our Asset Allocation portfolios.  While these sectors have faced short term headwinds, we expect improvement in the future as their prices converge back to their fundamental value.  Like the Sox, these sectors have the potential to go from worst to first.

Enjoy the exciting baseball and Big Papi’s last playoff run.

Go Sox!



                Charlie Toole, CFA, CFP,                                    Portfolio Manager

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