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One look at the S&P 500 sector scorecard tells you everything you need to know about the state of the U.S. economy.
Technology and Consumer Discretionary stocks are outperforming (alongside small caps) in 2018 while Consumer Staples and Utilities are the year-to-date losers. This classic investing set-up is long U.S. #GrowthAccelerating versus short U.S. #GrowthSlowing. (This is the precise playbook we've been suggesting investors follow all year). No surprise there. The U.S. economy has accelerated for 7 consecutive quarters (on a year-over-year basis).
The sector-level performance divergences have been particularly wide of late. Consumer Discretionary (XLY), Nasdaq and Tech (XLK) registered all-time highs alongside the Russell 2000 recently. Meanwhile, on the losing side of the ledger, the Utilities sector (XLU) has been clobbered in up-tape for U.S. equities, hitting the sector for -724 basis points of underperformance relative to the S&P 500. Consumer Staples stocks (XLP) are down -10% YTD. Pretty ugly.
This is a healthy reminder to investors why they should have stuck with the most “expensive” (for a reason) pockets of U.S. Growth, as the rest of the world (China, Europe, Emerging Markets) slows from 2017 cycle peaks. The reason? "Expensive” stocks get more expensive as late cycle U.S. consumption, employment, and wage growth all do what they always do at this late stage of the cycle: Accelerate.
Our outlook for U.S. growth and inflation has been spot on this year. Our outlook gets really interesting in the next 3-6 months. We have the US economy entering Quad 4 over that time period (a scenario in which both growth and inflation #slow from their current cycle peaks).
Quad 4 is where you buy things like Treasuries, Utes, and Consumer Staples (or bond proxies). So that’s where most of the debate our clients are having with us is centered on right now: the timing component of this call.
Right now, we're sticking with U.S. #GrowthAccelerating.
