Leaders-Laggards

Cyclicals have been leading the market over the past month, but the biggest gains have begun moving beyond just industrials and towards previous laggards, financials and energy. With the macro backdrop deteriorating and fundamentals looking fragile, current risk-on conditions could potentially flip quickly. Utilities might have another leg lower as the final obligatory bounce occurs in equities, but I don’t expect it to last indefinitely.

Now that the latest data has kept the momentum going, we’re seeing industrials hand off leadership to other cyclical areas of the market, such as financials and energy. The latest triumvirate of good news - solid growth, low jobless claims and falling inflation - has been good for the economy in general, but it has resulted in the market rally broadening out. Real estate is turning into a tale of two markets.

Of all the growth sectors to underperform last week, tech was the one that buckled the least. Loan defaults are likely to become a bigger issue in the near future, but banks appear to be emerging from its black cloud. Despite last week’s pivot towards defensive issues, small-caps continue staging a modest comeback. Last week’s outperformance from utilities was probably the sector’s biggest move since the banking crisis earlier this year.