≈ Here’s a hint. They start with a “B” and end with an “ANKS.” ≈

Traders,

Interest rates drive the cost of capital and are an integral input to countless economic models. From a trading perspective, the direction of rates can pull money from one sector while pushing it into another. I’ve seen dozens of charts in my day which illustrate the concept of sector rotation. Most overlay sector performance with the business cycle to show when each sector exhibits relative strength.

Last week I came across one that reflects which sectors do best and worst in rising rate environments (which we’re in right now!). I shared it below for our Chart of the Day. Here are a few key takeaways.

First, financials are the indisputable champions during rising-rate environments. As I explained in my recent Options Theory blog (see here), it is long-term rates rising, not short-term ones. Banks are in the business of borrowing short rates and lending long ones. When the difference between the two widens, their profit margins expand.

Second, defensive sectors underperform. I can think of two reasons. One: REITS and utilities pay higher dividends and are thus viewed as bond proxies. And if you missed the memo, bond prices are getting thrashed. Two: interest rates are rising because of higher economic growth expectations. This makes cyclicals far more attractive than defensive sectors.

Keep this in mind as you view our weekly newsletter gridiron showing sector performance.

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Chart of the Day

Bank of America says buy banks while steering clear of real estate, utilities, and health care.

I wrote a chant for defensive sectors in rising rate environments. “U-G-L-Y, you ain’t got no alibi. You UGLY, hey, hey, you UGLY!”

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Video of the day

Coach Tyler’s Winning Picks From Trade Masters

Coach Tyler shows us his 5 winning picks from last night’s trade masters in this clip from Thursday’s Halftime Report $APA $FCX $GM $JPM $CRM

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