Mega-Cap Rally Takes a Breather
How Cyclicals, Utilities, and Small-Caps Steal the Spotlight Post-Memorial Day
The mega-cap rally looks like it’s at least taking a pause here as cyclicals, utilities and small-caps have been leading the way since Memorial Day. A lot of market folks are talking about the large-cap to small-cap rotation that’s happened over the past two weeks. That may be the short-term trade of the moment and the outperformance of financials, industrials and value stocks would support that, but I’m looking at utilities as more important here. They’ve also been leading the S&P 500 since Memorial Day, which could be part of that pendulum bounceback that I’ve warned about recently. The strength of utilities is a little weaker here since it’s not being supported by either consumer staples or low volatility stocks, but it remains worth watching.
Treasury yields continue to hold relatively steady here, but that could change at next week’s Fed meeting. According to the cash markets, it’s unlikely that we’ll get a rate cut at this meeting, but there’s still a better than average chance we’ll get another before the cycle is over. Long bonds are still reacting to potential policy changes and could have trouble rallying if the Fed surprises the markets. Given what we know about liquidity levels, the slowdown in retail sales and the problems within the manufacturing and commercial real estate spaces, it’s probably unwise to get too aggressive here and too caught up in the small-cap rally. Global central banks are still leaning towards hiking rates further, as evidenced by how the Reserve Bank of Australia and the Bank of Canada surprised the markets this week.
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