As the press today prematurely ejaculates over the ASX200 crossing 5000 points, let’s pause for a moment to consider where we are at.
First, dead ahead is full media climax at 5025.1 points. The intraday post-GFC high. Once above that, it’s blowoff time.
So what’s driving the rally besides everything? I’ve have drawn up a chart of the major industry sectors. The winners are banks (green), health care (orange) and consumer staples (light blue).
This is a strange mix.
Traditionally, banks are interest rate sensitive and are thus cyclical stocks so that makes sense. Health care is traditionally seen as a play on consistent earnings in difficult times so that does make sense. Consumer staples are another traditionally conservative sector, with solid yields but unspectacular growth.
These are strange drivers for an interest rate rally in any typical cycle. But it isn’t typical is it?
Banks are so protected that they’ve become go-to yield stocks in bad times and are being grossly inflated on the cyclical upswing.
Like banks, consumer staples are attractive dividend stocks as financial repression lowers yields elsewhere, then enter blow-off when the cycle turns and nobody trusts monetary policy to actually boost spending.
Health care is being reinvented as a growth sector owing to baby-boomer aging and, as one of the few sectors with solid fundamentals, is headed for space.
Normally it would be consumer discretionary, materials and industrials that would lead at this juncture in the cycle.
Traditional rotations are nowhere in this rally. That’s not necessarily a problem but it does make the rally look lop-sided as certain sectors get very over-valued. If monetary policy actually works then I would expect the high flyers to slow and everything else to catch-up.
But nobody seems to think it will. At least, investors don’t want to bet on it.
The forward price/earnings ratio is now 19.
