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Dec. 21, 2019, 9:18 a.m. EST

Good news: the ‘stock-bond ratio’ just hit bottom. Here’s how to use it to invest.

It’s many of the same themes that stand to benefit from “the reflation trade”

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By Andrea Riquier


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Could the high “beta” of sectors like biotech be the best way to invest next year?

If the global downturn has bottomed and economic growth rebounds in the coming year, what is the best way to invest?

A new analysis from Ned Davis Research comes up with some familiar responses to that question, with a twist.

The firm’s ETF strategist, Will Geisdorf, uses a measurement called the “stock-bond ratio:” the S&P 500 divided by the U.S. Long-Term Treasury Bond Index, to confirm the coming recovery, and to offer some selections. As the ratio rises, stocks do better than bonds, and vice versa.

“The stock/bond ratio has bottomed prior to the economy in each of the last seven global slowdowns,” Geisdorf wrote in a recent analysis. “Barring an escalation in the trade war, we should see a recovery in early 2020 based on historical lead times.”

Related: Bond yields can’t stay low forever, Dudley says. Not so fast, says one analyst.

Geisdorf’s analysis of which exchange-traded funds are most likely to benefit in this environment returns a set of funds that are higher in beta, or volatility and risk, than the broader market. The sector bets expressed by these funds, including biotech, health care, and banks, also stand to do better in a reflationary environment (here’s an earlier MarketWatch piece on research from Geisdorf pointing to the first signs of reflation in markets and the economy, from September.)

Tellingly, Geisdorf’s analysis confirms other, fundamental, research that suggests investing in many of the same sectors. Biotech, health care services, energy, and banks all have the best “valuation risk/reward,” Geisdorf noted.

Here are his ETF picks.

ETFs with highest sensitivity to the stock/bond ratio
VanEck Vectors Oil Services ETF /zigman2/quotes/207596637/composite OIH  
SPDR S&P Oil Services ETF /zigman2/quotes/203527521/composite XOP  
ARK Innovation ETF /zigman2/quotes/204808965/composite ARKK  
United States Oil Fund LP /zigman2/quotes/203483736/composite USO  
SPDR S&P Regional Banking ETF /zigman2/quotes/200108291/composite KRE  
SPDR KBW Bank ETF /zigman2/quotes/201006419/composite KBE  
Global X Robotics & Artificial Intelligence ETF /zigman2/quotes/205896633/composite BOTZ  
ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/composite MJ  
Energy Select Sector SPDR Fund /zigman2/quotes/206420077/composite XLE  
iShares Micro-Cap ETF /zigman2/quotes/203365365/composite IWC  
Source: Ned Davis Research analysis

Related: Here’s what may drive stocks even higher (hint: not the trade war or the Fed)

/zigman2/quotes/207596637/composite
US : U.S.: NYSE Arca
$ 3.76
-0.26 -6.47%
Volume: 7.70M
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$ 31.04
-1.86 -5.65%
Volume: 12.97M
April 1, 2020 8:00p
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$ 40.24
-3.76 -8.55%
Volume: 776,404
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/zigman2/quotes/203483736/composite
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$ 4.38
+0.17 +4.04%
Volume: 119.03M
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US : U.S.: NYSE Arca
$ 30.48
-2.11 -6.47%
Volume: 9.12M
April 1, 2020 8:00p
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US : U.S.: NYSE Arca
$ 25.16
-1.80 -6.68%
Volume: 2.43M
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/zigman2/quotes/205896633/composite
US : U.S.: Nasdaq
$ 17.07
-1.07 -5.90%
Volume: 987,983
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US : U.S.: NYSE Arca
$ 10.56
-0.84 -7.37%
Volume: 879,528
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/zigman2/quotes/206420077/composite
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$ 27.62
-1.44 -4.96%
Volume: 23.83M
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US : U.S.: NYSE Arca
$ 62.64
-4.39 -6.55%
Volume: 73,563
April 1, 2020 8:00p
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Andrea Riquier reports on housing and banking from MarketWatch's New York newsroom. Follow her on Twitter @ARiquier.

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