Weekly Risk Signals

Inflation risk is beginning to become a bigger theme and the markets have been reacting accordingly. There is a risk-off pulse that’s been building over the past several weeks with some leadership from defensive sectors and themes. Another round of inflation is weighing heavily on investor morale. The lumber/gold signal flips to risk-off for the first time since November.

All four signals move to risk-on this week, although the positioning for most of them is still pretty neutral. Last Monday’s volatile trading triggered a rotation, not a broad sell-off. Between what’s going on in the tech sector, the hawkish tone from the Fed last week, a slower than expected GDP reading in Q4 and the uncertainty surrounding U.S. trade policy, there are certainly some short-term headwinds that could prevent stocks from pushing higher.

The markets continue to signal a mixed level of caution. Utilities continue to outperform the S&P 500, but some of its defensive counterparts, such as consumer staples and low volatility, are failing to confirm it. The dollar index may be entering a period of higher volatility. At this point, the political discourse is likely to have a fairly significant impact on the direction of risk asset prices.