Below is an assessment of the performance of some of the most important sectors and asset classes relative to each other with an interpretation of what underlying market dynamics may be signaling about the future direction of risk-taking by investors. The below charts are all price ratios which show the underlying trend of the numerator relative to the denominator. A rising price ratio means the numerator is outperforming (up more/down less) the denominator. A falling price ratio means underperformance.
LEADERS: STRANGE BEDFELLOWS: UTILITIES AND TECH ARE DOMINATING THE EQUITY MARKET
Utilities (XLU) – Still Showing Life
Utilities are taking a bit of a break here, but the uptrend looks like it’s still intact for now. As the market digests the reality that the Fed is unlikely to come to the rescue with rate cuts anytime soon, tech & growth have been getting some renewed run. However, with transports looking incredibly weak, long-dated Treasuries starting to make a comeback and volatility looking a bit more unstable, defense is still showing life.
Technology (XLK) – NVIDIA Is Drowning Out The Real Story
The delay of a Fed rate cutting cycle may have killed the cyclical trade for the time being, but it’s pulling investors back into the tech sector after months of underperformance. This combination of an economy that’s perceived as being in good shape and the AI/NVIDIA story may be keeping investors in a risk-on mood, but one company’s earnings report shouldn’t be shadowing the weakness that’s apparent in many other areas of the market.
Long Bonds (VLGSX) – Is The Revival Beginning?
Long bonds are starting to make a comeback here. It’s noteworthy that it’s happening at a point in time where the Fed is talking about keeping rates higher for longer. Defensive assets have been mixed over the past couple weeks, but if Treasuries start running here, it could mark a major shift in investor sentiment towards broader risk-off behavior. So far, rallies going pretty much back to the COVID recession have failed, but this remains worth watching.
Treasury Inflation Protected Securities (SPIP) – Interest Has Waned
Inflation became a hot topic (no pun intended) when we got two months of readings showing that it was accelerating again. Since then, investors seem to have priced in expectations and interest in inflation protection has waned. This week’s PCE report will provide another data point to work with, but it seems that, barring a rapid surge, TIPS prices and this ratio remain range-bound.
Junk Debt (JNK) – More Liquidity Ahead
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