Utilities Continue To Signal Risk Remains Elevated
Defensive Sectors Are Coming Together
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: DEFENSIVE SECTORS STARTING TO COME TOGETHER
Consumer Discretionary (XLY) – Retailers Still Warning
Retail stocks have delivered a mix of news during the Q2 earnings season. While top and bottom line results have generally been fine, many are still warning that the consumer is getting weaker and they’re needing to offer deep discounts to get customers in the door. Consumer spending figures look good, but they’re increasingly needing to use credit card debt and “buy now, pay later” schemes to make it happen.
Materials (XLB) – Some Short-Term Potential
Materials stocks remain volatile, but strong outperformance last week is a good sign for future potential. Growth rates are strong enough that they could drive a short-term rally in cyclically-sensitive areas and the rotation of growth and into value would provide another boost. Manufacturing is obviously still struggling and demand is at risk of turning soft, but there’s some short-term potential here.
Industrials (XLI) – Ideal Current Conditions
The fact that industrials have been able to hang on to July’s outperformance and continue to trend higher has been impressive. Current conditions - resilient growth plus easing monetary conditions - would be ideal for another leg higher in this sector as long as they can remain stable. Another jolt in the labor market or drop in inflation would be risks signaling conditions getting worse.
Financials (XLF) – Big Beneficiary Of Conditions, But Watch Spreads
Perhaps no sector has benefited from the drop in yields and prospect of a long and drawn-out Fed rate cutting cycle as much as the financials. Q2 earnings results have been reasonable enough, but durable economic growth and a long-awaited jolt to loan demand have investors optimistic. This is contingent, of course, to credit spreads. This ratio has been a fairly reliable leading indicator of credit spreads over the past year. If this ratio heads lower, spreads could be heading higher.
Utilities (XLU) – Still A Market Leader
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