We have reallocated within the U.S. Sector strategy’s less economically-sensitive sector exposure, reflecting the evolution of the economic backdrop and opportunities created by recent market action. We increased our exposure to the Consumer Staples Sector and, to fund this increase, we reduced the portfolio’s exposure to the Health Care Sector, the strategy’s largest sector overweight. We have also taken this opportunity to rebalance portfolios.
Given the progress made thus far in the economic cycle, we believe maintaining exposure to less economically-sensitive sectors is warranted, and a shift in market conditions has presented an opportunity to move back to an overweight in Consumer Staples. In January of 2017, we had reduced exposure to the Consumer Staples Sector to increase the economic sensitivity of the portfolio and reduce risks from rising interest rates. Since then, the U.S. Consumer Staples Sector has underperformed the broad U.S. market by more than 20 percentage points, and prior risks we saw for the Consumer Staples Sector have eased. Valuations for the Consumer Staples Sector have declined materially, and sentiment now seems overly negative toward the sector. U.S. interest rates have also risen, reducing a key risk to Staples. As investors refocus on fundamentals in the current environment of moderate economic growth, the Consumer Staples Sector offers stable earnings growth potential which should support positive relative returns.
Meanwhile, the Health Care Sector has provided strong absolute performance over the past year-and-a-half, roughly in line with the broad market, and it has materially outperformed in recent weeks following the announcement of the Trump administration’s Blueprint to Lower Drug Prices, which reduced some investor uncertainty toward the sector. We continue to have a very positive view toward Health Care, and it remains our largest sector overweight.
Overall, these allocation adjustments represented an opportunity to take advantage of recent market shifts, increase Consumer Staples to an overweight, and keep portfolios aligned with the economic backdrop without changing our aggregate target exposure to less economically-sensitive sectors.