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: TREASURIES ARE BEHAVING LIKE TREASURIES, WHICH CREATES OPPORTUNITIES
Consumer Discretionary (XLY) – Macro Backdrop Doesn’t Support More Spending
Growth stocks have fallen firmly out of favor here, but this sector remains surprisingly resilient. The retail environment remains very much a mixed bag. Some retailers are figuring out ways to operate in this environment, but just as many are struggling with slower consumer demand. Spending has been holding up, but a weaker macro backdrop could mean it’s just a matter of time before it starts drying up too.
Industrials (XLI) – Multiple Signals Suggesting A Negative Move
Despite the worries about a slowdown in the economy, industrial stocks have actually managed to hold up fairly well here and hang on to recent outperformance. I don’t know how much longer this can last given which way the macro winds are blowing. Commodities prices are weak. Manufacturing is weak. The labor market is weakening. All of these signs point to a potential pullback in the near future.
Financials (XLF) – A Quality Boost
Even as cyclicals pull back, financials continue to be a market leader in 2024. The recent bounce could be due to a couple of factors. First, the declining interest rate trend should help thaw the lending market and improve interest income potential. Second, there’s been a big rotation back towards quality stocks since the August VIX spike. This sector tends to score well in the quality factor and is likely helping to pull it higher.
Utilities (XLU) – Finally Getting Confirmation
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