Cyclicals Are Quietly Building a Positive Narrative
2023.07.11 15:56
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 – Fundamentals Over Potential
The consumer discretionary sector () has replaced tech as the most consistent outperformer in this market. The positive sentiment supporting risk assets remains in place, but the strong labor market along with strong wage growth numbers has investors banking that the consumer can stay strong and keep spending well into the 2nd half of this year. This could be an example of people betting on positive short-term fundamentals as opposed to the potential of AI.
Technology – Resilient if Not Rallying
While tech stocks () haven’t necessarily taken a step back following their huge 2023 rally, the desire to keep pushing valuations higher and higher seems to have worn out. Most of the valuation contraction that took place in 2022 has been re-taken and investors should at least be aware of valuations at this level. Tech has remained a resilient sector, almost a defensive one, throughout the past six months and could maintain support even if fundamentals continue to deteriorate.
Communication Services – Will Facebook Be the New NVIDIA?
Like tech, communication services () seem to be leveling off here, although the longer-term uptrend hasn’t been broken yet. Facebook (NASDAQ:) could find a new source of investor enthusiasm if Threads works out similar to how NVIDIA (NASDAQ:) did earlier this year. Nothing seems to be cracking short-term conditions supporting risk assets and that could keep this sector supported until we see a significant change.
Industrials – Expanding For Longer
Cyclicals () continue to be the beneficiary of the rotation out of (or at least pause in) growth and tech stocks. Positive housing data, strength in the labor market and the rebound in commodities all suggest that investors have gotten more comfortable with the idea of economic expansion for at least a little while longer. There are clearly a number of variables and signals that suggest otherwise over the longer term, but optimism is still in place for now.
