There are tentative signs that the profit advantage may be starting to slowly shift away from defensives and toward cyclicals.
First, the gap between hard and soft data remains unusually wide. The longer hard data takes to play catch up, the less likely the Fed will be re-priced more aggressively. History shows that until this gap narrows, defensive sectors are likely to retain the upper hand in terms of relative performance.
Second, commodity prices and the U.S. dollar – especially versus emerging market (EM) currencies – are still signaling that the cyclical/defensive ratio has more downside.
Bottom Line: within the context of the current broad equity market consolidation, it should continue to pay to remain with a defensive over cyclical portfolio tilt for a little while longer.