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Sector Rotation and Monetary Conditions

C. Mitchell Conover, Gerald R. Jensen, Robert R. Johnson and Jeffrey M. Mercer
The Journal of Investing Spring 2008, 17 (1) 34-46; DOI: https://doi.org/10.3905/joi.2008.701955
C. Mitchell Conover
An associate professor of finance at the University of Richmond in Richmond, VA.
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  • For correspondence: mconover@richmond.edu
Gerald R. Jensen
A professor of finance at Northern Illinois University in DeKalb, IL.
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  • For correspondence: gjensen@niu.edu
Robert R. Johnson
The deputy CEO and a managing director at CFA Institute in Charlottesville, VA.
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  • For correspondence: bob.johnson@cfainstitute.org
Jeffrey M. Mercer
An associate professor and Lubbock Bankers Association Professor of Finance at Texas Tech University in Lubbock, TX.
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  • For correspondence: jeffrey.mercer@ttu.edu
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Abstract

We investigate the efficacy of a sector rotation strategy that utilizes an easily observable signal based on monetary conditions. Using 33 years of data, we find that the rotation strategy earns consistent and economically significant excess returns while requiring only infrequent rebalancing. The strategy places greater emphasis on cyclical stocks during periods of Fed easing, and overweights defensive stocks during periods of Fed tightening. Interestingly, the benefits from the rotation strategy accrue predominantly during periods of poor equity market performance, which is when performance enhancement is most valued by investors. Specifically, during restrictive monetary periods, returns to the strategy are nearly twice that of comparable investments, yet the strategy assumes less risk. Overall, our results suggest that investors should consider monetary conditions when determining their portfolio allocations

TOPICS: Equity portfolio management, portfolio construction, performance measurement

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Sector Rotation and Monetary Conditions
C. Mitchell Conover, Gerald R. Jensen, Robert R. Johnson, Jeffrey M. Mercer
The Journal of Investing Feb 2008, 17 (1) 34-46; DOI: 10.3905/joi.2008.701955

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Sector Rotation and Monetary Conditions
C. Mitchell Conover, Gerald R. Jensen, Robert R. Johnson, Jeffrey M. Mercer
The Journal of Investing Feb 2008, 17 (1) 34-46; DOI: 10.3905/joi.2008.701955
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