Risk-off sentiment continues to accelerate. That’s clear in the ongoing selloff in US stocks, which are now showing a deeper shade of downside momentum.
Consider the SPDR S&P 500 ETF (SPY), which fell today. Looking at the trend in terms of weekly data reflects a selloff that looks set to endure for the near term. At the moment, SPY is on track to post its sixth weekly decline.
Yet there’s still a fair amount of variation within the market. Looking at US stocks on a sector basis continues to show that energy (XLE) is still an upside outlier.
Ditto for consumer staples (XLP).
Utilities (XLU) are still holding up relatively well, too.
Otherwise, several sectors are in varying stages of rolling over. Consider real estate (XLRE), which is now posting a clear break to the downside.
Some sectors are in a gray area. Materials stocks, for example, are arguably on the fence, although this slice of the market looks set to test its recent support levels.
For a number of sectors, however, there’s no room for debate. Technology (XLK), for instance, is struggling with a hefty dose of gravity.
The selloff today surprised some pundits in the wake of this morning’s hint that the recent inflationary surge is peaking. US consumer inflation eased slightly to an 8.3% year-over-year increase through April (in unadjusted terms), the Labor Dept. reported earlier today. That’s still high—close to a 40-year peak, in fact. But the pullback from March’s 8.5% marks the first softer annual print since last August. It remains to be seen if the slightly lower inflation trend is noise. But today’s news is at least a step in the right direction, and may prove to be the start of a downtrend. We’ll see.
The bond market seems to be toying with the idea. The US 10-year Treasury yield continued to edge down today, setting at 2.91%, the lowest since Apr. 29, based on Treasury.gov data. Nonetheless, it’s still premature to say that the months-long rise in yield has run its course.
Meanwhile, Mr. Market isn’t impressed with the peak inflation narrative, at least not yet. In fact, some analysts suggest that deeper economic pain awaits.
“It’s just a matter of time until we talk about a cost of living crisis and this is what it is,” says Allianz chief economic advisor Mohamed El-Erian. “Everybody is focusing on the headline number, that’s understandable but look at the core, 6.2%, and look at the composition of inflation that suggests there are many drivers now. This is no longer an issue about just the Ukraine war, this is a broad-based inflation process that the Fed has fallen behind in a major way.”
The stock market seems to agree and is inclined to continue to discount inflation risk further. The case for staying defensive still looks compelling. ■