Investors struggle to understand the extent of rising inflation and grasp the aggressiveness of the rate hikes. Fed Chair Powell's comments at the Jackson Hole meeting last week spooked investors, leading to another risk-off scenario.
There is no safe place to hide. It is an unusual market, as money tends to rotate from one area to the next. A lack of rotations is one thing, but you would expect specific sectors to attract interest from money managers, asset allocators, sector rotators, and institutional traders, depending on the economic and stock market cycle.
Almost everything has been down for the year.
A quick review of asset classes shows only two assets trading in positive territories this year, including the Light Crude Oil (WTIC) and iPath Bloomberg Commodity Index (DJP).
The other eleven assets have suffered losses for the year, some firmly entrenched in bear market declines (20%-plus). Defensive assets have also not been immune to selling this year.
Under a risk-off scenario, investors turn to US Treasuries and other fixed-income assets. iShares 20+ year Treasury Bond (TLT) and iShares Investment Grade Corporate Bond (LQD) have both witnessed sharp selling this year.
With most assets broadly declining, does this imply a true market capitulation? Is this the end phase of the broad market sell-off as investors throw in the towel and sell everything, giving up on any chance of recouping losses? Or is this the start of the capitulation phase of the bear market?
Another review of the eleven S&P 500 sectors also reveals striking similarities. Two of the eleven S&P sectors show positive gains this year – the S&P Energy sector (XLE) and S&P Utilities (XLU). Nine other S&P sectors have suffered double-digit setbacks.
Investors tend to favor natural resource-intensive sectors and markets in an inflationary environment. Yes, XLE has outperformed its S&P peers. However, rising inflation should also benefit Materials (XLB) and other hard assets (i.e., Gold, Silver, Copper, etc.). It has not been the case as XLB, GLD, SLV, and other commodities-intensive sectors have also witnessed significant selling this year.
S&P Utilities (XLU) remains a classic defensive sector that benefits during periods of market turmoil. The relatively high dividend yield and a low beta of XLU often attract investors looking for a place to hide in the marketplace.
However, it is too small of a sector for money managers to overweight because of market capitalization. Typically, other defensive sectors such as Healthcare (XLV) and Consumer Staples (XLP) tend to act as a collective hedge along with Utilities. This year, there is a disconnect as XLV and XLP also succumbed to the broad market sell-off.
With most S&P sectors declining, does this imply a rolling bear market?
A rolling bear suggests the bear market will eventually make its way to the leading areas and sectors that have held up well during the early stage of the market decline.
The last two rolling bear markets were the 2000-2002 Tech/Telecom Dot.com debacle and the 2007-2009 Global Financial crisis.
If this is another rolling bear, the current bear decline is only halfway through its bear move, at least from a duration and magnitude perspective.