Blink and You’ll Miss It, but Treasuries Are Starting to Turn
2023.06.27 15:44
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.
Consumer Discretionary – Ease off on the Enthusiasm
Even as tech stocks turn choppier relative to the broader market, discretionary stocks () remain the most consistent outperformer in this market. While retail sales in the U.S. came in better than expected last month, I’m not sure there’s reason to get too overoptimistic here. This sector declined in late 2022 in large part due to the repeated warnings we were getting about consumer activity. A lot of those risks are still there, only at higher valuations.
Technology – Showing Signs of Exhaustion
Along with the communication services sector, the tech () rally is showing signs of exhausting. There’s no question the AI-driven rally was due for a breather, but is there another sector or theme ready to take over? The breadth within the sector hasn’t balanced out yet and is still being driven by the mega-cap names. This trade may have some legs for a few weeks longer, but the relative value just isn’t there right now.
Communication Services – Developing Long-Term Theme
This sector () has spent the past few weeks moving with the market instead of ahead of it. At a broad level, there are short-term signs of a modest rotation into some cyclical areas, but overall conditions seem to still favor growth themes. Communication will be a stronger theme over the long-term as the nascent AI evolution continues to develop, but it will be a volatile ride and one which may not have a good risk/reward trade-off at the moment.
Industrials – A Tenuous Position
Industrials () have been one of the cyclical areas of the market that have been benefiting from the topping out of the tech trade. Overall, the manufacturing sector is still contracting (maybe even quickly), but factory order numbers still look healthy for the time being. Until we get firmer signs of a recession, this is a sector that may have a chance of holding up here, although it’s tenuous.
