Price Action & Performance
After a tough start to the year, XLI has outperformed the S&P 500 Index for 3 consecutive months. 2023 was a year of consolidation for the industrial sector, but price action and performance have turned bullish on broad internal strength. The longer-term price chart shows that investors haven’t missed out on potential outperformance yet, and XLI SPDR looks attractive from a technical perspective.
Economic and Policy Drivers
Inflation is a dominant theme across all sectors, but with very different implications. XLI outperformance would likely be driven by a hotter inflation print and a strong Q2 earnings season. Industrials is a broad sector which explains why it often performs in the middle of the pack. The many different business lines within the Sector often take their cues from different macro inputs. For example, Airlines do better when Crude Oil prices are falling generally, while Rails do better when Crude Oil prices are rising. 2 big policy themes are animating the sector at present. The aforementioned inflation theme, and the continued onshoring of supply chain from China et al. to US as economic sanctions remain in place between the two countries. This has been a broad tailwind to Industrials which is one of the only sectors to see sustained outperformance in small and mid-cap. tiers over the course of the post-pandemic cycle. This theme has dovetailed with inflation to create some powerful tailwinds behind certain industries within the Industrials sector.
How Can XLI Help?
XLI is a powerful tool for Industrials investing. It allows an extremely cost effective way to get the very broad exposure the sector offers all in one instrument. If this month’s inflation print is hot, Sanitation services like RSG and WM, as well as Machinery plays like CAT and DE should benefit. Investors might also find the fixed government contracts of RTX, GD and LMT etc. attractive. If inflation comes in cool, there are several areas of the sector that respond positively to lower rates as well like Building Products which ties into the lack of supply that has been driving homebuilders and home price appreciation. Airlines would likely do well if inflation eases and the consumer gets some confidence. There are also several AI plays in the sector like ETN and PH which have benefited from the enormous NVDA halo over the last 12+ months.
In Conclusion
Industrials should be considered as an “all weather” sector. It has a hard time being THE leader of the market, but it also has enough diversity of business lines that it is a good place to be when there are cross currents in the equity market as there are here in the near-term. I recommend an overweight position in XLI for May.
Chart | XLI Technicals
- Price is supported at $114, but the strong relative strength curve (panel 2) implies the sector is likely to continue outperforming even if the correction continues
