Leaders-Laggards

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.

It looks like we might finally be seeing the end of the junk bond rally. A hawkish Fed was bad for the risk asset markets, but it was good for the dollar. No longer is this being viewed as the start of a new expansion cycle, but one that might need to hang on if inflation is re-emerging. With utilities, this could very well be a case of the future looking better than the past.