The markets again took another minor step towards taking some risk off the table, but it was far from unanimous and shows that short-term factors are still clouding the picture. Utilities were massively oversold coming into the week and used that to help outperform the S&P 500 by more than 1%. Value, low volatility and defensive sectors also led the way as the mega-cap tech trade continues to unwind. There’s a lot of opportunity now that the “magnificent 7” stocks have lost their shine and it looks like some of that is starting to shift to the defensive side of the market.
Treasuries keep getting kicked around without any sustainable direction. The Fitch downgrade was clearly a downside catalyst, but it’s been a lot of volatility more than anything. The 10-year yield went from 4.12% down to 3.97% all the way back up to 4.16% just this week alone. The bond market had a big reaction to Friday’s PPI report, so maybe this was a realization that the process to get back to 2% is going to be very long and drawn out or perhaps investors think that the Fed might not be done or they’re just not sold on the emerging risks in this economy right now. The one thing that’s been missing throughout the past year and a half is any sense of risk-off behavior in Treasuries. At this point, I think every week that goes by where long-term yields remain stuck in a range raises the chances that it only gets unstuck with a violent move. Thursday’s piece I wrote highlighting some of the additional risks that have emerged recently I fear aren’t being given the level of credence that they should be right now.
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