Weekly Risk Signals

If you consider the gains in the S&P 500, the outperformance of small-caps, the underperformance of utilities and the near-term rally in lumber prices, there is a risk-on pulse happening. I’m still really interested in watching emerging markets. This is a group that has consistently lagged ever since the COVID pandemic.

The most consequential market event that could happen over the next few days is the U.S. government intervening to save the Treasury market. As dire as the situation may be, it does present an opportunity for stock investors. I don’t think it’s an accident that the utilities signal flipped to risk-on this week.

What’s frustrating about the current environment is that these signals continue to tell the right story, but the results are not playing out as they should. The signaling continues to be correct, but the opportunity set is broken. Last week’s market action looks less like a response to inflation concerns and more like one to the idea that something is fundamentally broken here.