Leaders-Laggards

Equity investors still seem convinced that the economy can still navigate a relatively soft landing despite a lot of data suggesting otherwise. Defensive equities are rotating from leadership to neutral positioning over the last few weeks as cyclicals start taking control. The bond market has been a tale of two halves of the yield curve - the short end responding to a stubborn Fed and the long end reacting to recession risk.

Industrials stocks wrapped up the 2nd half of 2022 as one of the market’s best performing sectors. Banks could end up being an attractive underdog pick for the coming year. The performance of energy stocks relative to the S&P 500 has correlated pretty highly to crude oil prices over the past year.

The combination of an economy that’s still sustaining and a tight labor market is keeping short-term conditions in favor of select cyclical sectors. Commodity prices are weakening from pandemic era highs, but commodities producers are still doing well. Utilities have been picking up strength for two months, providing one of the strongest risk-off signals in this market.