The market’s turbulence continued last week, although we wrapped up the week with a split tape. Only the Dow finished higher, while the S&P 500 and Nasdaq were down. That isn’t exactly my definition of a “risk-on” market environment.
Nonetheless, bulls made some modest strides last week, which I’ll share in just a moment.
The key here is to realize the stock market is adjusting to the prospect of lower rates for the remainder of the year - let’s talk about which sectors stand to benefit the most…
Bulls Come Back Up for Air
The top-performing sector last week was financials (XLF), and they weren’t messing around as they closed up over 2.8% on the week, and at their highest weekly and monthly level in history.
Financials are one of those sectors where I like to ask my fellow market participants, “Do you think this is a sector that’d be outperforming if stocks were about to crash?”
Once upon a time, financials were considered to be a sector that benefitted from higher interest rates. But that was in another macroeconomic world.
Now it appears the market is more concerned with the steep yield curve. In other words, interest rates in the short-term are below interest rates in the long-term.
Due to the rally we’ve seen in long-term bonds, and dropping inflation, the Fed now has the “all clear” to cut those short-term rates. This will help steepen the yield curve even further, and should be a tailwind for financials.
But I don’t think it’s just financials that will benefit from lower rates. I think consumer discretionary, technology, and real estate especially will do well. The losers will be energy and basic materials. Fortunately, these are smaller sectors of the market, so the impact would be muted.
I’ll keep you posted,
-Gianni