Renewed fears of economic contraction have aligned macro level trends in US Equities and Interest Rates as a tailwind to low beta sectors of the stock market. SPDR’s XLU, XLRE, XLP and XLV have outperformed since equities began correcting in mid-July. Price has taken out two intermediate-term lows since the correction began on July 16, which sets up an ambiguous scenario for price. There is potential for further correction with the 4600 level a max drawdown scenario barring the advent of recession. Regardless, the probability of a longer correction/consolidation has risen given recent soft economic data and investors are repositioning into lower volatility sectors.
Current Equity Trend: Correction
S&P 500 Index 1yr, daily
The congestion zones on the chart suggest support for the index between 4600-4900. The Resistance levels on the chart are key technical “tells” where an upside move would improve the chart pattern. The diagonal red line is the current downtrend channel resistance. The dilemma for the bull is there is a dearth of market moving data releases until NVDA’s potential Q3 earnings release at the end of August, and the present month is the most negative seasonal period of the year. We expect a downward bias to equities over the next few weeks given the current setup.
Sector Coincident Returns: Equity Downtrends 1989-present
Coincident returns, 4 most recent completed S&P 500 Downtrends
Tailwinds: XLP, XLU, XLV
Utilities were an outlier to the downside when equities sold off in the fall of 2023. Now that equities have come under sudden pressure, they are making up ground in the present cycle.
Current US 10yr Yield Trend: Downtrend
US 10yr Yield, 6months, daily
With the US equity market pitched into corrective mode by weak economic data, the consolidation in US 10yr Treasury Yields has resolved to the downside. Similar to the equity market, Yields are bouncing from oversold conditions in the very near-term, but the break-down establishes a bevy of overhead resistance above the Yield. Given the status of the chart, we’d expect any bounce of the low to fade out between 4.06% and 4.18%. Rates would need to get back above 4.33% to flip the Yield chart to a reversal. With the Fed. expected to ease short-term rates, and international equities trading off in sympathy with the US we expect markets to consolidate in the near-term as we won’t get a definitive challenge to the recent bearish data until the next earnings season in October/November. Much like equities, we also don’t see an obvious upside catalyst for rates in the near term.
Sector Coincident Returns: Interest Rate Downtrends 1989-present
Coincident returns, 4 most recent completed Interest Rate Downtrends
Tailwinds: XLP, XLU, XLV
We note recent outliers XLE, XLK and XLRE. XLRE has been an interesting case as it is historically a falling rate beneficiary but has been going through a fundamental shift in outlook. We are preferring it in the present cycle as it is showing clear signs of a technical bullish reversal. The rest of the current performance and historical study is basically chalk at this point.
Conclusion: The Current Setup Has US OVERWEIGHT XLU, XLP, XLV and XLRE in our Model Portfolio.
Links to our studies on coincident sector returns during uptrends and downtrends in these benchmarks can be found here:
US Sector Historical Return Profiles During Equity Uptrends – ETF Sector
US Sector Historical Return Profiles During Equity Downtrends – ETF Sector
US Sector Historical Return Profiles During Interest Rate (US 10yr Yield) Uptrends – ETF Sector
US Sector Historical Return Profiles During Interest Rate (US 10yr Yield) Downtrends – ETF Sector
US Sector Historical Return Profiles During USD Price (DXY Index) Uptrends – ETF Sector
US Sector Historical Return Profiles During USD Price (DXY Index) Downtrends – ETF Sector
Sources: Bloomberg
