Healthy Sector Rotation?

JC Parets
October 6, 2023

One of the better indicators of a healthy bull market is when you see Consumer Discretionary stocks (the things we want) outperforming Consumer Staples stocks (the things we need).

The ratio between Discretionary and Staples is one we look at during bull markets, to confirm what the indexes are doing, as well as in bear markets to find divergences that may turn before the indexes themselves (see '08-'09).

This really has been one of the more reliable indicators for many years.

And wouldn't you know it, as pessimism spikes, volatility pops, and the permabears begin to pound their chest again, Discretionaries are putting in higher lows relative to Staples.

This is classic sector rotation we see during healthy market environments:

You're seeing the S&P500 correcting, during what is a perfectly normal time of the year for it to correct, however underneath the surface, the healthy rotation persists.

And what's hilarious is that you'll find people who are either bad at math, or too lazy too count (neither are a good excuse), suggest that it's only 7 stocks going up in price this year.

Meanwhile, the Equally-weighted Consumer Discretionary Index is doing the exact same thing relative to the Equally-weighted Consumer Staples Index that we're seeing in their market-cap equivalents plotted above:

If the market is about to completely fall apart, like economists, sell side analysts and the twitterati keep telling us, then how come Consumer Discretionary continues to show so much relative strength - on both a cap-weighted AND equally-weighted basis?

How come we haven't seen any rotation at all into Consumer Staples, that historically occurs when stocks are under pressure?

Is it because rising rates are keeping Utilities and REITs down, and so Staples are just being included in that selling?

That's the excuse people are making to try to justify the positive rotation.

Do you believe that?

Or do these historic relationships still matter?

Chime in here!

Let us know what you think.

JC

 

Meet Me in Chicago

I'll be in the Windy City on October 11, where I'll be giving a LIVE presentation at the Chicago Board of Trade.

Bring your clients and colleagues, and let's talk current market conditions and what we're doing about it.

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