Closing Thoughts for the Week

The past three trading days marked a major reversal of the risk-on trends that have been in place pretty much non-stop since the beginning of May. Is this a sign of a more significant reversal of this summer’s risk-on trade? It’s remarkably similar to what the markets did at the beginning of the year when I said conditions favored a melt-up in January. The one thing that’s still missing at this point is a bigger move in Treasuries.

The markets got the news they wanted this week, which is that the disinflationary process continues on both the consumer and producer sides. Most sectors posted weekly returns within ~1% of each other, so this current move is definitely broadening out. Next week tees up the start of the Q2 earnings season. The slowing pace of inflation, positive real wage growth and positive real interest rates might have households feeling better about their financial situations again.

The market has mostly become numb to the idea of changing Fed expectations or the possibility of even higher rates this year. It was interesting to see the return of fear into the markets even for just a short time. It’ll be important to pay attention to both the fundamentals and the long-term view during the 2nd half of this year. In terms of intermarket signaling, we’re seeing utilities outperforming and small-caps underperforming again.