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: THE BEST SETUP FOR RISK-OFF IN A WHILE
Utilities (XLU) – Best Setup In A While
A sharp spike in utilities relative to the S&P 500 is something we’ve seen several times over the past few quarters without much lasting success. At the risk of sounding cliche, this time could be different because gold and Treasuries are rallying at the same time. It’s perhaps the best setup we’ve seen for this sector in some time, but we still need to see if it has legs or it turns out like the others.
Industrials (XLI) – Attractive Combination of Growth & Value
Industrials have been enjoying a two-fer of positive catalysts - a resilient U.S. economy and a rotation out of previous market leaders. With investors not yet bearish enough to usher in a broader risk-off trade, cyclicals have been a favorable landing spot for those looking to take advantage of the U.S. economic growth narrative, while tilting towards more value-oriented themes at the same time.
Materials (XLB) – Range Of Possible Outcomes Is Wide
This sector has been a huge beneficiary of the cyclical renaissance, but there are still reasons for caution. Industrial metal, chemical and natural gas prices have been very volatile and that makes for as much downside risk as upside. If the manufacturing space can at least keep its head above water, I think there’s the potential for an extension to this run, but the range of possible outcomes is wide.
Financials (XLF) – The Impact Of CRE
Financials aren’t having as much success as the rest of their cyclical counterparts at the moment, but they are hanging on. Some of that may have to do with the volatility and uncertainty around the direction of interest rates, but investors are also getting spooked by the negative financial impact of a CRE bust in the future. Developments in the real estate space may have as much influence as anything for banks moving forward.
Real Estate (XLRE) – Driven By Rates, Not Macro
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