U.S. stocks posted another winning week, but it marked the return of cyclical and defensive sectors once again. Utilities was the best-performing sector of the week with real estate and financials also posting solid gains. In general, rate-sensitive areas of the market performed better, although it’s impossible to ignore another 2% gain in gold prices.
Risk asset prices are still enjoying the current Goldilocks period - healthy economic growth and a global central bank monetary easing cycle. We could add a solid start to the Q3 earnings season to the mix. The big banks got off to a strong start and the improvement in investment banking activity suggests that financial institutions may finally be loosening the reins and getting back into deal making again. Netflix, while it’s a single anecdotal example, showed solid subscriber growth, indicating that consumers seem to be willing to continue spending on discretionary items. While the economic risks that I’ve been detailing in the past are still present, the resilience of the U.S. economy in terms of growth, sales and earnings has been impressive. For now, the rally in equity prices feels justified, but the ongoing strength in utilities and gold should act as a reminder that conditions aren’t full risk-on.
I think that inflation remains worth watching. Gold and TIPS have been outperforming for weeks and I don’t think that’s a signal that should be ignored while equities are rallying. As I laid out earlier this week, the outcome of the election could determine whether or not significant tariffs will be on the table or not. If they are, expect inflationary pressures to rise, maybe significantly, and that could cut into any potential soft landing.
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