U.S. Sector portfolio positioning intra-quarter update as of 9/13/2022

With deterioration in some economic data and the Fed’s aggressive monetary policy tightening, we see increased risks and have moderately increased the portfolio’s overweight of defensive sector allocations.

September 13, 2022


Reduced mid-phase equity sector overweight

  • Trimmed an existing Communication Services sector ETF holding
  • Trimmed an existing broad Information Technology ETF holding

New allocation to late-phase Consumer Staples sector

  • Added new Consumer Staples ETF position

Recent economic developments, including deterioration in some economic data and the Fed’s monetary policy stance, point to later-cycle economic conditions, with slower economic growth and increasing recession risk, in our view. Thus, we believe added exposure to defensive allocations is appropriate.

We recognize that many core economic readings remain sound, including consumer spending, business investment and labor market data, and the U.S. economy is likely, in our view, to deliver positive real GDP growth in Q3. Looking forward, however, we see increased headwinds to consumer spending and business investment, which we believe could contribute to earnings shortfalls relative to consensus estimates, particularly for more economically sensitive sectors.

We have also taken this opportunity to rebalance portfolio holdings back to target weights.


Reduced U.S. mid-phase equity sector overweight

  • We believe consensus estimates for the Information Technology and Communication Services sectors appear to anticipate near-peak margins in calendar 2023 and may be too optimistic, given factors like digital advertising pricing headwinds, prior demand pull-forward, and cyclical headwinds, particularly for semiconductors and other technology hardware.
  • At the same time, we continue to see positive secular trends benefitting these sectors, like the shift to cloud computing, adoption of digital payments, and ongoing business investment for increased efficiency and a post- COVID work environment.
  • Thus, while we have reduced exposure to mid-phase sectors amid evolving risks and we continue to avoid the most economically cyclical early-phase sectors, we remain overweight to both Information Technology, Communication Services, and mid-phase sectors overall.

New allocation to late-phase Consumer Staples sector

  • We believe that during both the slowdown and recession stages of economic cycles, U.S. Consumer Staples earnings should remain more resilient than the broad market, even with potential headwinds from input cost inflation and slowing topline growth.
  • While the Consumer Staples sector currently trades at a relative premium to the S&P 500 and near the upper end of its historical range, these dynamics are common during economic slowdowns and recessions.
  • Interest rate risk for rate-sensitive defensive sectors like Consumer Staples and Utilities is diminished, in our view, as we see limited upside to intermediate/long-term rates as well as the potential for additional Fed Funds tightening to result in deeper yield curve inversion and recession fears, which we believe should benefit Consumer Staples’ performance relative to other sectors.

The most recent complete presentation can be viewed here.

Any portfolio characteristics, including position sizes and sector allocations among others, are generally averages and are for illustrative purposes only and do not reflect the investments of an actual portfolio unless otherwise noted. The investment guidelines of an actual portfolio may permit or restrict investments that are materially different in size, nature and risk from those shown. The investment processes, research processes or risk processes shown herein are for informational purposes to demonstrate an overview of the process. Such processes may differ by product, client mandate or market conditions. Portfolios that are concentrated in a specific sector or industry may be subject to a higher degree of market risk than a portfolio whose investments are more diversified.

Holdings, Sector Weightings and Portfolio Characteristics were current as of the date specified in this presentation. The listing of particular securities should not be considered a recommendation to purchase or sell these securities. While these securities were among WestEnd Advisors’ U.S. Sector holdings at the time this material was assembled, holdings will change over time. There can be no assurance that the securities remain in the portfolio or that other securities have not been purchased. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities presently in the portfolio. Individual clients’ portfolios may vary.

Portfolio outlook, positioning, and attribution
Portfolio positioning intra-quarter
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