The S&P 500 has been extremely quiet for about the last month or so, remaining roughly flat for what has been the longest period of stability in two years. The result has been that it’s gotten even more difficult to find returns, although cyclicals have outperformed defensives during this period of tranquility.

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No move bigger than 1% for S&P 500

In Goldman Sachs’ Weekly Kickstart dated August 26, analyst David Kostin and team said the S&P 500 didn’t move any more than 1% in any day for the 34 days before that date. They explain that this is the longest period without a daily move of up or down 1% since summer 2014. It’s also been a period of stability for the VIX, which has sat at 14, holding volatility steady over the same timeframe.

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Last week the S&P 500 declined 0.06% with Financial Services being the best-performing sector with its miniscule gain of 0.2%. Health Care was the worst-performing sector with a decline of 2.2%. The Goldman team expects the S&P 500 to be at 2150 in 12 months, which would be a 1% decline. They predict that the index will sit at 2100 at the end of the year, representing a 3% decline.

Difficult to see returns

Kostin and team note that stock picking has become difficult as the three-month S&P 500 return dispersion ranking within the fourth percentile in 30 years. They add that this points to a “tight distribution of company returns,” and although stock picking has been hard, some strategies have still worked.’

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Cyclicals have outperformed defensives by 500 basis points over the last month, while Information Technology returned 4%. Telecom and Utilities declined 5%.

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The Goldman team recommends buying the S&P 500 and selling 10-year Treasuries.

Cyclicals outperform defensives

Deutsche Bank strategist Parag Thatte and team stated in their August 26 Asset Allocation report that the flatness of the S&P 500 has masked a large sector rotation. The 10-year bond yield has remained flat as well. However, in the first half of the year, defensive and rate-sensitive funds have seen huge inflows, which means just over the last couple of months, inflows to defensive funds such as Utilities, Consumer Staples and minimum vol funds have stalled. Meanwhile rate-sensitive dividend and REIT funds are still seeing robust inflows, they explained.

There has been a bit of better news for other U.S. equity funds as well, Thatte and team explained, as outflows from them have stopped. However, they have yet to see any inflows.

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Equity funds flip to overweight

The Deutsche Bank team said that U.S. equity fund positioning has risen slightly due to an increase in exposure for mutual funds.

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Mutual funds are overweight Materials, Energy and Healthcare and underweight defensives, excluding Health Care and Financials. Thatte and team added that mutual funds have outperformed over the last four weeks thanks to cyclical sectors outperforming defensives.

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Active mutual funds have been having their best performance run in 18 months, in fact, as U.S. equity mutual funds which are still “cyclically positioned across sectors” have outperformed the S&P 500 since early July. However, they still have a lot of ground to make up because they still lag the index by 160 basis points year to date and 200 basis points since January 2015. Active mutual funds are still seeing massive outflows, and the DB team expects this to continue until they demonstrate “sustained outperformance.

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They also said fund flows “have been very noisy around zero,” which is to be expected as the most recent data surprises are close to neutral. They added that consensus for the key U.S. data points over the next couple of weeks are in line with recent history.