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 REVERSE YEN CARRY TRADE EMERGES WITH A VENGEANCE
Utilities (XLU) – Best Stretch In Years
Utilities relative to the S&P 500 is having its best 4-week stretch of outperformance in more than a decade. In other words, short-term conditions are about as risk-off as you can get. This has suddenly become the best-performing S&P 500 sector this year, something that I predicted back in January. This ratio is still only back to late 2023 levels and I think there’s plenty more upside potential left in this sector.
Energy (XLE) – Geopolitical Risk Back On The Rise
Crude oil prices are starting to drop along with everything else right now, which is probably the right response given what we’re seeing globally. Geopolitical risks might be back on the rise again and that could eventually lift oil and energy stock prices higher. At a high level, it’s difficult to see energy getting much momentum if cyclicals broadly remain out of favor.
Industrials (XLI) – Cyclical, But Defensive
This sector has actually been holding up pretty well in this downturn and stocks, such as Lockheed Martin, might be a big reason why. Companies with more durable demand seem to be holding up better. In Lockheed’s case, there may be a geopolitical risk element that’s working in its favor, but this might end up proving to be a sector that has more defensive properties than thought.
Materials (XLB) – Also A Defensive Aspect
Materials is another area of the equity market that’s been holding up well. While agricultural commodities keep slipping, industrial and precious metals prices have failed to succumb to the underperformance of other cyclical areas of the market. The manufacturing sector is still struggling, so I wouldn’t call this anything based on fundamental factors, but there might be a defensive aspect working in its favor.
Financials (XLF) – Tail Risks Growing
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