Leaders-Laggards

Utilities have finally settled down, but they’re not indicating the risk-on signal that investors want. Value is not providing any kind of meaningful outperformance here, which is something you might expect in a strong cyclical recovery trade. The move in yields looks a little overdone and credit spreads are back to 20-month lows, so there’s plenty of downside potential here.

Like gold, recent outperformance in utilities has been partially derived from falling interest rates, but also from a flight to safety pulse that’s not apparent in the major averages. Cyclicals are enjoying a real run here amid optimism that an anticipated Fed rate cutting cycle might help pull off the soft landing after all. While bulls will use this as evidence that risk-on sentiment is in full force, we’ve seen small-caps lead in adverse markets before.

Growth isn’t dead, but there has been rotation happening, particularly into cyclicals. Bank stocks have gotten a nice bump from the decline in interest rates, but the macro backdrop still looks very weak. If I’m right about the credit event, junk bonds have even more downside now than they did just a month ago. Lumber and gold prices remain fairly balanced here.