Leaders-Laggards

The overall retail sector outlook is still questionable, but it’s possible the consumer is able to hang on for longer. If inflation continues making further progress towards deflation and we start to see cracks in the labor market, then I think the flight to safety trade will be on. The recovery in lumber prices and a big reason why the lumber/gold signal has flipped back to risk-on has been changes in interest rates.

Last week marked the return of a trend we’ve seen all throughout 2023 - the domination of mega-cap growth and tech. Despite volatility, long-dated Treasuries are still posting gains here and shouldn’t be viewed as out of favor. Small-caps and emerging markets have the greatest potential in a turnaround, based on valuations if nothing else, but this is starting to look like outright capitulation.

With such a strong market rally last week, it would make sense to assume that utilities were a major laggard, but that wasn’t the case. If the Fed is truly done tightening conditions and the labor market is ready to crack, there’s a lot of upside remaining for Treasuries. Tumbling yields on the long end of the curve damaged interest rate differentials for the dollar, although its case as a safe haven trade remains intact.