Mike Zaccardi, CFA, CMT | Oct 18, 2022 12:17
Two sectors that had been outperforming the S&P 500 through much of 2022 were Real Estate and Utilities. The narrative made some sense—hard assets should do well during inflationary times and the consumer was still strong, so housing prices and rents should fare relatively better than say, cyclical chip stocks or industrial plays.
In the utility space, steady and reliable—some might say boring—electricity providers and firms owning important energy transmission lines should not be slammed by an economic downturn. So those groups did fine as other stocks plunged. Real estate and Utilities feature better returns until September.
Source: Stockcharts.com
Source: Goldman Sachs Investment Research
New variables have thrown a wrench into that thesis. First, the highest mortgage rates in 22 years—above 7% as of Monday afternoon—will surely lead to at least a short-term depression in real estate transactions, harming some REITs. Moreover, history shows that even real estate firms can be just as volatile as the S&P’s Guide to Sector Rotation . That outperformance is gone. Are we nearing the market bottom as a result? Unknowable, but keep your eye on the Financials sector (which is now outperforming) and then the Information Technology and Consumer Discretionary sectors for new leadership before we can have confidence in a true low.
Source: Stockcharts.com
The Bottom Line
While everyone focuses on earnings season, the Fed, and what the mega-cap growth stocks do over the coming weeks, keep your eye on what’s going on with two small and somewhat defensive spots of the market. Real Estate and Utilities, which were positive from a year ago on a relative basis through much of the third quarter, are now rolling over. It could be a sign that the market cycle has taken another step toward a market low.
Disclaimer: Mike Zaccardi does not own any of the securities mentioned in this article.
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