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There is something very consistent about what is going on sector-wise in the S&P 500.

In what is a down year so far (the market is off 1.4 per cent), the top sectors are utilities (up 3.9 per cent), health care (a gain of 3 per cent), consumer staples (a rise of 2.3 per cent) and telecom (up 3.4 per cent).

In 2014, which was an up year for the market (the S&P 500 gained 11.4 per cent), among the best performing sectors were utilities (advancing 24.3 per cent), health care (a gain of 23.3 per cent) and staples (rising 12.9 per cent), though telecom (down 1.9 per cent) lagged behind. In general, these sectors have a knack for rising in any type of market.

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There is no doubt that, with an average price-to-earnings multiple of 19 times on a trailing basis and 18 times on a forward basis, that these four defensive sectors are quite expensive.

On both trailing and forward, the other six S&P 500 sectors (consumer discretionary, energy, financials, industrials, IT and materials) on average trade at a full-multiple-point discount to these defensive sectors – normally, they trade at a relative premium, but things are far from normal.

What is surprising is that these defensive sectors are not typically outperformers in periods when the U.S. economy is accelerating – but there are exceptions, and we are living through one right now.

First, because of the plunge in bond yields overseas, which has been "imported" to the U.S. Treasury market, rate-sensitive stocks are outperforming. The low level of bond yields puts the dividend yield into a greater focus for investors in general, and these four defensive sectors command a 3.1-per-cent dividend yield on average, versus the 1.9-per-cent average yield in the other more cyclical groupings.

Imagine being able to own a group of sectors that generate a yield that exceeds what you can get on the 30-year Treasury bond by some 70 basis points, let alone 130 basis points more than what the 10-year T-note can deliver today – this is unheard of.

Second, the other characteristic of these defensive sectors is that they are less exposed to the U.S. dollar's runup (and the related negative earnings impact), as well as to the overseas economy, which is struggling (as per the recent downgrades by the World Bank and IMF).

These sectors have more of a domestic-demand feel to them – the average share of sales derived from abroad by these four sectors is half the average share among the other six sectors.

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So instead of the outperformance of the defensive stocks making any statement on the economic growth backdrop, at least locally, that is not the case at all.

It more likely reflects the fact that they are sectors that are "closer to home" and as such have greater earnings stability characteristics at the current time.

They are also far superior bond surrogates relative to their other sector counterparts, given their yield advantage.

Moreover, it would be tempting to say that these defensive sectors, if you will, are expensive – maybe they are.

Or maybe they have merely been rerated for the reasons I cited above – greater immunity from the dollar impact, less exposed to weak demand overseas, better yield plays in an environment where yield is scarce and lower earnings variability (health care and utilities, in particular, are still the few sectors that have a three-month earnings per share revision ratio close to 1, versus the overall market now at 0.64).

All one has to do to find a similar template is to go back to the Asian crisis in 1997-98 – today it is Europe, back then emerging Asia. The ex-U.S. economy was soft, the American economy was solid, the U.S. dollar was firming rapidly and bond yields plunged.

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Go back to the period of July, 1997, to October, 1998, and you will find that telecom surged 57 per cent, health care bounced 37 per cent, utilities jumped 24 per cent and staples rose 11 per cent – an average gain of 32 per cent versus a 5-per-cent average gain for the other six S&P 500 sectors and all at a time when U.S. growth was ripping.

The conclusion: We cannot ignore the impact that the U.S. dollar, the foreign economy and bond yields can have in terms of causing the investor base to rerate the various equity sectors. In other words, it is not all about domestic growth.

David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.

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