Financial Gravity and the Yield Curve
Flat Curve Winners and Losers
Let's return to an analytic technique first introduced here in February and used several times since, that of measuring the relative impact of a market factor on industry groups. Negative numbers in the table below indicate groups benefiting from or at least not hurt by the flatter yield curve, while positive numbers indicate groups hurt by the flatter curve. The groups with statistically significant relationships (90% confidence interval) against the large-cap S&P 500, the mid-cap S&P 400 and the small-cap S&P 600 are displayed. The list of victims is pretty clear across market capitalization levels. Utilities, REITs, oil-related groups, pharmaceuticals and financial firms, particularly thrifts and mortgages, should underperform by virtue of the flattening curve. Relative winners are in the technology sector, especially semiconductors and software, and in electrical goods manufacturing. This list of winners and losers relative to the forward rate ratio is not significantly different from the one posted in May. As the forward rate ratio between two and 10 years has declined from 1.02818 to 1.00578 during the interim, let's see how effective the relative performance signals were.| Relative Industry Group Betas to Forward Rate |
|||||
| S&P 500 | S&P 400 | S&P 600 | |||
| Group | Beta | Group | Beta | Group | Beta |
| IT CONS&SERV | (1.278) | COMP&PERPH | (1.091) | MARINE | (1.208) |
| ELEC MANU SRVC | (0.938) | AIRLINES | (1.077) | SYS SFW | (1.144) |
| DEPT STORES | (0.834) | SEMICONDUCTORS | (1.021) | ENVR SRVCS | (0.893) |
| MCYCL MANF | (0.819) | IT CNSLTNG | (0.937) | TRDNG COMP | (0.761) |
| COMP&ELECT | (0.723) | DIV COM SV | (0.909) | DATA PRCS & OTS | (0.749) |
| APPLIC SFTW | (0.697) | TRUCKING | (0.871) | SEMICONDUCTOR | (0.694) |
| SEMICONDUCTORS | (0.691) | OFFCE SERV | (0.832) | ADVERTISING | (0.654) |
| COMMERCIAL P | (0.572) | HLTHCR FAC | (0.620) | LEISURE PROD | (0.644) |
| RAILROADS | (0.559) | TECH DIST | (0.570) | TRUCKING | (0.579) |
| DIV COMM SER | (0.527) | ELE CMP&EQ | (0.503) | SPEC STRS | (0.482) |
| DRUG RETAIL | (0.513) | APPRL & ACCESS | (0.478) | ||
| INDUST GASES | (0.469) | COMP & EQUIP | (0.395) | ||
| SYSTEMS SFTW | (0.430) | APPL SFW | (0.372) | ||
| DATA PRCS & OTS | (0.428) | ||||
| ELEC COM&EQU | (0.362) | ||||
| PHARM | 0.356 | MLTIUTIL | 0.345 | GAS UTIL | 0.350 |
| DIV BANKS | 0.433 | ELEC UTIL | 0.393 | ELEC UTIL | 0.378 |
| GAS UTIL | 0.461 | TRFT/MRTG FINCE | 0.400 | REITS | 0.507 |
| REAL EST INV | 0.598 | PRP&CAS INS | 0.404 | THFT & MRTG FIN | 0.635 |
| THFTS & MRTGE | 0.721 | PAPER PRDCT | 0.608 | HOMEBUILDING | 0.693 |
| FOREST PROD | 0.728 | LEISURE FC | 0.649 | INSUR BRKG | 0.811 |
| OIL & GAS EQU | 0.782 | REITS | 0.678 | OIL&GAS EXPL | 0.821 |
| SPECIALIZED FIN | 0.856 | PHARMCTCLS | 0.820 | OIL&GAS | 0.919 |
| OIL&GAS EXPX | 0.949 | OIL&G STR&TRD | 0.849 | PAPER | 0.942 |
| OIL&GAS DRIL | 1.375 | OIL&G EQUI | 0.853 | MOV & ENTR | 1.022 |
| GOLD | 2.947 | MLTISECTOR | 0.899 | HSHLD PROD | 1.091 |
| SOFTDRNKS | 0.912 | OIL&GAS REF | 1.102 | ||
| OIL&G EXPL | 1.062 | OIL&GAS PROD | 1.252 | ||
| Source: Bloomberg | |||||
| Capitalization-Weighted Six-Month Total Return |
| Source: Bloomberg |
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