Leaders-Laggards

The retail sales numbers for November and early holiday sales figures should shore up confidence in the near-term. The breakout to new multi-year highs for small-caps has officially happened, which means that this run could have longer legs and strength than prior more narrow rallies. Long bonds have obviously made significant gains, but even ultra-short Treasury bills are starting to see their yields drop in anticipation of rate cuts in the first half of 2024.

At a macro level, the credit contraction is the biggest long-term threat to financials, but investors are reacting currently to how margin pressures are declining due to the rate decline. I think it’s important to remember here that the Fed begins cutting rates because they see cyclical weaknesses ahead and rallies tend to be short-term in nature. The cyclical rally is giving dividend stocks a lift here, but the defensive nature of many payers is acting as a counterweight.

Utilities have finally settled down, but they’re not indicating the risk-on signal that investors want. Value is not providing any kind of meaningful outperformance here, which is something you might expect in a strong cyclical recovery trade. The move in yields looks a little overdone and credit spreads are back to 20-month lows, so there’s plenty of downside potential here.