Price Action & Performance
Like many longer-term lagging sectors in 2024, XLU began to shift from negative to positive in February as upside leadership began to narrow. Since February the sector has continued to improve in absolute and relative terms and is showing signs of more sustained bullish reversal as the calendar turns to May.
Economic and Policy Drivers
Since inflation emerged as the Fed’s most prominent threat, markets have been caught in a feedback loop comprising “a strong underlying economy à manifestation of marginal inflation à Fed talk of policy tightening à corrective action as investors contemplate a higher probability of recession/late cycle which discounts the market in the near-term à investors start to see opportunity and start bidding higher again”. It appears that the emergence of marginal inflation increases in April will lead to another round of corrective behavior for equities or at least a rotation away from dis-inflationary beneficiaries. If the prints continue, recession probability will likely tick up and Utilities would come into favor in that scenario.
How Can XLU Help?
XLU offers the broad exposure needed to shift allocation at a low cost when prospects for the Sector are uncertain. With 52 stocks across 9 industries, XLU shares offer diversification at an affordable price. If sticky inflation turns out to be less sticky when the CPI prints on May 15, investors can jump on the change in trend by increasing allocation to the broad array of industries that will have likely been oversold to the downside. In the meantime, we can keep a tactical UW exposure on the Sector to add alpha during the current corrective period.
In Conclusion
XLU has been a structural laggard since the bull market trend’s inception in early 2023. Now that inflationary concerns are on the radar there is likely a chance for the bullish interlude in the sector’s downtrend to continue. I would recommend a modest OW in XLU for May.
Chart | XLU Technicals
- XLU has begun nascent bullish reversals in both absolute and relative terms
