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 MARKETS LOVE RATE CUTS, BUT FOR HOW LONG?
Technology (XLK) – The Dominance Is Ending
The markets continue to recover in anticipation of Fed rate cuts finally starting in September, but tech has so far not been the go-to sector of choice for investors. Rate cuts usually precede an economic slowdown and that’s not favorable for pricey tech stocks. There will likely be a certain built-up level of demand for mega-caps in such an environment, but it appears that the days of tech dominance might be ending.
Communication Services (XLC) – Rate Cuts Fully Priced In
Like tech, this sector has sputtered in the short-term. The lack of magnificent 7 leadership has certainly been a contributing factor, but the willingness of investors to pay premium prices for stocks appears to be waning. The market has fully priced in Fed rate cuts for the remainder of 2024 (and maybe then some) and that’s unlikely to provide much more juice. The slowing labor market is becoming a more serious risk factor.
Consumer Discretionary (XLY) – Uncertain Outlook
Consumer conditions remain a series of mixed signals. On one hand, we’ve got rising delinquencies and deteriorating purchasing power. On the other hand, retail sales and consumer spending have stayed surprisingly durable. We’ll get the latest personal spending figures later this week, but this is still a sector with an uncertain outlook.
Small-Caps (VSMAX) – The Clock Starts
We’re starting to see a repeat of July, where small-caps benefited from the great rotation. The catalyst is similar - the belief that interest rate cuts are near and will be aggressive. The Fed laying out an actual timeline helps remove a degree of uncertainty and that was a large contributor to stock price gains, but now the clock starts on how quickly recession risks grow now that the Fed will soon start cutting.
Long Bonds (VLGSX) – Picking Up Steam
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