Leaders-Laggards

Last week marked the return of a trend we’ve seen all throughout 2023 - the domination of mega-cap growth and tech. Despite volatility, long-dated Treasuries are still posting gains here and shouldn’t be viewed as out of favor. Small-caps and emerging markets have the greatest potential in a turnaround, based on valuations if nothing else, but this is starting to look like outright capitulation.

With such a strong market rally last week, it would make sense to assume that utilities were a major laggard, but that wasn’t the case. If the Fed is truly done tightening conditions and the labor market is ready to crack, there’s a lot of upside remaining for Treasuries. Tumbling yields on the long end of the curve damaged interest rate differentials for the dollar, although its case as a safe haven trade remains intact.

Utilities continue on their tear relative to the S&P 500 and it remains one of the strongest risk-off signals in the market right now. Treasuries look like they might finally be establishing a bottom here and, more importantly, acting as a risk hedge to equities. The next big catalyst for the dollar could come from Japan where the BoJ is loosening the band on yield curve control, which could be negative at the margins for the yen.