Path Matters More Than Prediction
Short-Term Bounce Incoming Before Larger Tail Event?
I talk often about how path matters more than prediction and this past week was a great example of that. After a powerful move higher relative to the S&P 500 over the past 3 weeks, utilities completely fell apart and moved back to 52-week lows. In relation to the broader market, utilities are now back to the level they were four weeks ago, so you could argue that this relationship is back to neutral levels again. I say that path matters more than prediction because these risk-on/risk-off shifts rarely happen in a straight line. The way that utilities have moved in such a violent manner over the past month may be indicative in and of itself that something is at risk of breaking in this environment, but it also demonstrates that there will be bumps along the path to the endgame.
I said recently that I believe the credit event has begun. If I’m correct on that, this past week’s underperformance of utilities will likely be irrelevant in the long-term. If it’s a credit event, the odds are very likely that we’ll see utilities outperforming the S&P 500 and Treasuries eventually returning as a safe haven asset. In the near-term, however, conditions can shift back and forth, sometimes quickly. In isolation, utilities severely lagging the broader market and Treasury prices plunging would both be risk-on signals for investors. It’s never quite that simple because right now we’re also seeing volatility continuing to rise and high yield credit spreads continue to slowly widen. The path, however, is never clear. Within both bear and bull markets, there will be periods where the opposite occurs and we may be in one of those periods now.
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