Equity View: Unwind Underweights in Homebuilders and Russell 2000
- By John Tierney
- 4 min read
Summary
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- We suggest investors unwind underweights in homebuilders and Russell 2000, via ETFs XHB and IWM.
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- We went to underweight on concerns that these rate-sensitive sectors would underperform if, as we expected, rates rose.
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Summary
- We suggest investors unwind underweights in homebuilders and Russell 2000, via ETFs XHB and IWM.
- We went to underweight on concerns that these rate-sensitive sectors would underperform if, as we expected, rates rose.
- After a 60bp runup in the 10Y Treasury yield, we think the rate selloff run its course for now.
- The primary reason to retain these underweight positions is expectations that higher rates will push the economy into recession in coming months.
- Today, we see little risk of a recession any time soon.
Unwind Tactical Underweights
In mid-August, we became concerned about the prospect of rising rates at the longer end of the yield curve. We suggested investors underweight homebuilders via the ETF XHB. A month ago, we also suggested underweighting the Russell 2000 via the ETF IWM.
These sectors have been interest rate sensitive historically and this year. Given that economic fundamentals remain sound, we viewed these trades as tactical, intended to run while rates were rising.
Since the initial XHB call, the 10-year Treasury yield has soared 60bp to near 4.8% (Chart 1).
Equities have come under pressure.
Over the term of both trades, the S&P 500 is down about 5%; XHB is down 8.8%, and IWM is down 9.3% from when we suggested each trade.
We suggest investors unwind these trades. We think the rate selloff has run its course for now, and these ETFs will settle into a new trading range – or recover somewhat if Treasury yield drop modestly.
The primary reason to continue an underweight position is if one expects the higher rate regime to push the economy into recession in coming months. Today, we see little risk of a recession any time soon.