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: DON’T LOOK NOW! SMALL-CAPS ARE COMING BACK TO LIFE
Consumer Discretionary (XLY) – The Growth Narrative Returns
As investors replace the “Fed cutting cycle as a catalyst” narrative with an admission that economic growth can drive prices higher as well, discretionary stocks have found new life. Retail sales numbers have been hit or miss, but personal income and personal spending figures are still looking strong. As debt levels continue to rise, we’ll see if this trend is sustainable, but investors seem optimistic about it for now.
Technology (XLK) – Magnificent 7 Trade Starting To Weaken
Tech stocks are turning choppy here as some of the magnificent 7 stocks are behaving not so magnificently. This is certainly contributing to other sectors beginning to lead the market, but doesn’t necessarily equal the demise of the sector altogether. Tech will remain vulnerable to downturns as long as a few stocks lead the way, which is still largely the case. The fact that some of them are starting to underperform suggests the sector could be getting tired.
Industrials (XLI) – Strong Rally, But Sustainability Is A Question
A delay in the anticipated Fed rate cutting cycle should be a net negative for cyclicals because persistently higher rates are designed to slow down economic activity. However, investors seem convinced that the manufacturing space can withstand this and perhaps even prosper in spite of it. The rebound in manufacturing looks like it might be a facade, so there’s a question of sustainability here.
Materials (XLB) – Volatility Ahead
Materials are having a nice run, grabbing on to the coattails of industrials, but this sector really looks more volatile than anything at this point. 2024 has featured sharp underperformance followed by sharp underperformance, so there may be an aspect of establishing true price discovery here. The market for metals, lumber and chemicals is mixed here and I’d expect more volatility ahead.
Financials (XLF) – Where Will Rates Go Next?
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