Weekly Risk Signals

The signals remain mostly in the risk-off position again this week despite last week’s big rally in U.S. equities. One underappreciated factor of the current market is volatility, both to the downside and upside. That’s a lot of short-term volatility that usually isn’t a good sign for longer-term returns. The focus will be on the Fed this week and its policy setting meeting. The only question is whether they’ll cut by 25 or 50 basis points.

The markets took a major risk-off turn last week after a series of poor manufacturing numbers and more evidence of a slowing labor market reignited recession fears. There’s a definite sense that investors are starting to look for the exits. Utilities, staples and Treasuries are looking particularly strong. The yen is on the move higher again and that’s going to keep the pressure on equities.

Defensive sectors, including utilities, have almost identical looking charts relative to large-caps. In other words, there’s some pretty broadly established risk-off strength within equities. The 10Y/2Y Treasury yield spread is back to 0% after being in negative territory since July 2022. I think the next several weeks could get really interesting.