Leaders-Laggards

I’m starting to get really worried about what we’re seeing in the bond market, particularly with long-term Treasuries. I think bonds may have over-priced in the return of inflation (or possibly the likelihood of increased debt spending) and it’s eventually going to need to be corrected. There’s still no action from small-caps in either direction - no outperformance from a reflation trade, but no underperformance either.

The market is largely buying into the soft landing narrative, but we’re still not getting the corresponding uptick in small-caps. I’m still concerned about the issues within the credit markets being mostly ignored, which creates long-term opportunities in undervalued groups like this one. The overall Treasury yield curve is reverting higher, but I still think there’s more going on here.

Utilities are no longer outperforming with the strength they did in July, but I don’t think it’s an accident that this is still the best performing sector year-to-date. As long as TIPS are outperforming Treasuries and gold is setting new all-time highs, I think we need to acknowledge that inflation is still a risk. It’s been an impressive comeback for the dollar, fueled by rate cut expectations getting progressively downplayed.