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: ALL DEPENDS ON POWELL AND INFLATION THIS WEEK
Consumer Discretionary (XLY) – Consumers Spending, But Racking Up Debt In The Process
Even though the market has begun tilting back towards cyclical leadership, the discretionary sector has continued to find steady life. The latest holiday sales data suggests that consumers are still spending, but the way they’re financing that spending - higher credit card and “buy now, pay later” usage - remains an issue worth watching. This week’s retail sales data likely supports the idea that consumers are still doing their thing.
Utilities (XLU) – Driven By Rate Changes
Utilities have finally settled down, but they’re not indicating the risk-on signal that investors want. There’s not much defensive in equities right now that’s showing strength, but the sharp drop in interest rates continues to provide a boost to this debt-heavy sector. Since a lot of the economic numbers we’ll get this week will have an impact on rates, expect a potentially higher degree of volatility.
Financials (XLF) – Big Tests This Week
The decline in interest rates along with lower inflation have fueled the potentially misguided belief that a soft landing is possible. Both of these will get a big test this week with the coming Fed meeting and latest round of inflation data. If either of these fail to deliver, rates probably shift higher and the cyclical trade could take a pause.
Industrials (XLI) – The Rally Doesn’t Have Legs
The markets are buying into the idea of a cyclical recovery here, but it’s likely dependent on the belief that the Fed is going to loosen by A LOT over the next year. If it does, it’s going to be due to some type of major tail risk event that the market is underpricing at the moment. In other words, enjoy the rally while it lasts, but conditions don’t favor it having legs.
Real Estate (XLRE) – Getting Short-Term Maxed Out
Keep reading with a 7-day free trial
Subscribe to The Lead-Lag Report to keep reading this post and get 7 days of free access to the full post archives.