ETF.com: That's counterintuitive to a lot of the way people think about investments—let me go find that worst-performing one, because it's got value.
Chisholm: That's exactly right; it is counterintuitive, but history shows this happens quite often, which is, again, not to say that it has to happen this time, but we should be conscious as investors of what that means. I always say that statistically you have to chase, which is a little bit of a nice catchphrase for people to remember.
The second thing that's really unique about financials is that, when they outperform, other cyclicals tend not to keep up. They don't offer the high odds or high alpha, on average. But over any one-year time frame, financials tends to dwarf other cyclical bets.
Ironically, the sector that actually outperforms in tandem with financials more often than not is consumer staples.
ETF.com: Why is that?
Chisholm: When financials work, they tend to be the only game in town, on a cyclical basis. Consumer staples is a little less defensive than the defensive sectors, but participates as well.
ETF.com: And on the other side of the coin, give me a sector that is falling out of favor in your analysis.
Chisholm: I'd say utilities, which is usually the counteropposite in terms of correlations between financials. When I look at the defensive sectors historically, consumer staples and health care have many things going for them. This is sort of a broad brush, but I’d say they have 80% odds of outperforming in a down market, and they have above a 50/50 chance of outperforming in an up market, meaning, they have some cyclical tendencies.
For health care, we can talk about what we've seen, which is their advantage from a multiple standpoint, and you haven't seen any margin decline yet.
For consumer staples, you're actually seeing a turn in margins because capex relative to sales has been so contained. They actually have some offensive characteristics as well.
Utilities, however, is the other side of the ledger. Where they'll outperform, let's call it 80% of the time in a down market, they’d only outperform 35% of the time in an up market. It’s sort of the negative correlation. They tend much more so than staples and health care to not outperform when profits accelerate, which is the base case going forward for all the reasons we described.
And for all our focus on rising interest rates, which is the only framework we need to know from an investment perspective, from a sector perspective it's not really great at determining odds. It’s not the significant factor historically, but it is specifically a negative factor for utilities. It changes your odds of outperformance from about 47% to something like 32%, which is not 0% odds, but it's pretty low.