Consumers Are About to Tap out
2023.07.25 15:59
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 (XLY) – Consumers Ready to Tap out
This sector () got slammed thanks to its 20% allocation to Tesla (NASDAQ:) last week, but the backdrop remains that consumers are still spending money even as monetary conditions continue to tighten. This probably starts hitting a point before the end of the year where consumers get tapped out and are forced to cut back spending. We’ve already seen credit defaults and auto loan rejections start to rise and the resumption of student loan payments adds another wild card.
Technology (XLK) – Depends on Earnings This Week
Of all the growth sectors to underperform last week, tech () was the one that buckled the least. Where it heads next will likely be the product of how the big mega-caps do on Q2 earnings this week. Given its run-up throughout 2023, this remains the one area of the market likely most vulnerable to any disappointing news.
Communication Services (XLC) – Expectations Elevated
This sector () was probably due for a bit of a breather and the pullback in growth and high beta stocks was the catalyst. Like tech, earnings are going to be the big focus this week and with expectations already elevated, the big names, including Facebook (NASDAQ:) and Alphabet (NASDAQ:), are going to need to deliver. This group, however, could be one of the bigger beneficiaries of the push towards AI, so don’t be surprised to hear how that’s going to weave into their future plans.
Industrials (XLI) – Cyclical Strength Broadening
In general, cyclicals () have been the biggest beneficiary of the pause in the tech rally, last week notwithstanding. With Q2 GDP likely to come in pretty strong again this week, there’s enough belief in the health of the economy that industrials should maintain some level of support. If financials and energy begin to participate, which looks like it may be starting, it could mark a deeper rotation out of tech.
