The signals have been indicating trouble for a little while now and it looks like the markets are finally starting to catch up. Over the past 2-3 weeks, the S&P 500 and Russell 2000 have been relatively flat, while utilities have gained 3% and gold prices have gone through the roof. The behavior of utilities is particularly interesting because the sector is outperforming while 1) most other defensive strategies are underperforming and 2) long-term Treasury yields have mostly been on the rise. You’d think both of those factors would be dragging utilities lower, but they’re not, which is why I think the current signal coming out of the sector might be an uncommonly strong one.
The lumber/gold signal is even more decisively risk-off. Over the past two weeks, gold prices have risen by 8%, while lumber prices have fallen by 8%, making it perhaps the firmest risk-off signal you’ll find in the markets today. Similar to what’s happening with utility stocks, lumber prices are plummeting at a time when we’re being told that commodities are strong, cyclicals are strong and the economy is strong. High level GDP growth expectations for 2024 do appear to be on solid footing, but, as I’ve said many times, lumber is a tell on the housing market (and real estate in general) and housing is a tell on the economy. What does it say when one of the core inputs of the consequential segment of the U.S. economy is plummeting when all else appears to be just fine on the surface? I think it says that investors may be misreading the market here.
When you look at the totality of the current environment - utilities are rallying in spite of other defensive sectors heading the other way, lumber is nose diving while other commodities are running higher and gold is experiencing a parabolic move up - there are a lot of risk-off signals flashing warning signs. So far, we still have yet to see the major catalyst that tips things over, but the setup for a drawdown in risk asset prices looks fairly compelling here. A sizable drop in Treasury yields would confirm risk-off conditions further, but they appear to be reacting more to inflation expectations & the Fed and, thus, could be an unreliable indicator in the short-term. But the fact that gold, lumber and utilities are not just telling the same story but doing so convincingly here should be concerning.
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