Leaders-Laggards

Utilities are starting to outperform again relative to the S&P 500 and that’s generally one of the better signs for risk-off behavior. The rebound in healthcare is particularly notable for me. Investors are continuing to move away from retail stocks as the Fed looks to keep conditions tighter for longer. As volatility increases and geopolitical risks start heating up, we could finally begin to see the divergence between Treasuries and stocks.

The growth potential in tech is obviously still present thanks to the AI boom, but I think valuations could soon become a problem. Junk bonds are in a particularly precarious spot. The dollar index is now at multi-year highs and it might not be done yet. I’ve said for a while now that small-caps hold the key for the U.S. equity market.

A bit of extra volatility last week has begun pulling some previous winners back down to finish off the year. There’s a fairly easy argument to be made that conditions for lower-grade credit are already challenged, but high inflation and few, if any, Fed rate cuts could finally see that getting priced in. With foreign central banks still preparing more multiple rate cuts in the coming year, prevailing trends could begin pushing the greenback even higher.