Home Stock Market Commentary The Stock Sectors Now Leading This Rally (Implications For Business Cycle)

The Stock Sectors Now Leading This Rally (Implications For Business Cycle)

I haven’t done an update on the markets since November 4, 2023. In that update I said that I was looking for a close above silver over $24 an ounce to signal the start of a new rally in precious metals and mining stocks. That signal got triggered and gold subsequently rallied over $2100 an ounce. It’s now a little below that level, but the mining stocks are having nice rallies and there is no reason to think that they won’t continue to go up next year, with the Federal Reserve announcing at its December meeting that it is not looking to raise interest rates anymore, and actually pondering when it may lower rates.

I didn’t do many updates during the summer, as I didn’t see any great opportunities to buy and the stock market went into a small correction, falling from roughly July into late October. Now the market is rallying again and everyone is bullish, and most gurus are touting the big cap tech stocks that most everyone already owns and so they like to hear about them.

The move since that October low, though, is not the start of a new bull market. In reality this cyclical bull market in the stock market began in late 2022, as the bear market of that year came to an end. At the beginning of this year, I said that I believed we were in a new cyclical bull market, as I cited the work of Walter Deemer. He showed how we saw a huge positive thrust in the internals of the market that always marked the stock of a new bull market. And it did. But, history also showed that this cyclical bull market would likely not lead to the type of year after year of gains as people experienced before 2020, but more likely a 2-3 year affair, as was seen in the cyclical bull markets of the late 1960’s and 1970’s.

So, I see this current rally, despite the Federal Reserve news used to justify it, as simply a continuation of the cyclical bull market that started almost a year ago now.

What is interesting is that we have seen a shift in the leadership of the sectors leading the market rally, since that October low, from what was leading before. Among the top performing sectors now are the following (since 10/26/2023).

Specialty Finance +60%

Residential Construction +44%

REIT’s +35%

Regional Banks +25%

IWM ETF +22.7%

Copper +22%

Utilities +18%

Silver Miners +13.2%

Gold Miners +10.4%

For the most part, these are all sectors that benefit when interest rates peak and do even better once interest rates start to go down.

Specialty Finance, for instance is made up of mortgage lenders, savings and loan banks, and financial institutions that lend at high interest to businesses and consumers.

Most of these sectors got smashed too, during the July-October stock market drop, because the decline was linked to a rise in interest as the ten year Treasury bond yield eventually went above 5% for a brief amount of time.

In fact, utilities at that moment had put on their worst year to date performance in decades.

The stocks fell so much, that many leading utility stocks approached yields of 10% at their lows.

Now, as this Federal Reserve interest hiking cycle is over, people are going into dividend stocks to lock in yields that are above 5% in many of them. I bought a few myself. For instance, one I took a position in is utility company Dominion Energy.

D is paying a dividend of 5.71%. I bought it in October when it was paying one over 6%.

The thing is when interest rates go down these utility stocks tend to go up as the dividends in them are stable.

A REIT I bought is CTO.

CTO is paying a dividend of 8.79%.

Again, if interest rates go down as so many are now predicting for 2024, these dividends become attractive and these type of stocks typically go up.

Now, when we see these sectors go up, it historically has implications for where we are when it comes to the business cycle.

You see, they typically do not go up together during the start of a new economic recovery or expansion phase, but in the final innings of one, as you can see from this chart from Fidelity.

This doesn’t mean that a recession is starting next month, what it means is that we are in the final innings, or “late” period, of this current growth business cycle. This pattern of sector rotation does not tell us how long these last few innings will last, but does tell us that when they are over look for the defensive sectors, such as utilities, to continue to do well and for most sectors to turn down again into bear markets.

My guess is that won’t happen till after the Presidential election, or in 2025, but all of this tells me that being defensive minded is still the key – and it’s been the message I have been saying over and again since this summer (the overall upside, after the big initial gains, at the start of a cyclical bull market for the indices becomes limited).

I think all of this also means that now is a good time to lock in current yields. That doesn’t meant throwing everything you have at dividend stocks. For many it may simply mean moving money out of money market funds and into CD’s and bonds where they can lock in the yields they are getting for the next year or two.

Gold and mining stocks also are poised to benefit as the Federal Reserve, surprisingly, has abandoned it’s inflation fight now completely after spending a year and a half claiming it would not lower interest rates until their were signs of a recession and as early as October multiple Federal Reserve officials were saying they could see the Fed Funds rate go over 6%.

But there is no sign of a recession now in the current economic numbers!

We need sound money!

Lowering interest rates when they don’t need to will devalue the value of the US dollar.

Why these Federal Reserve people have now suddenly, and sadly (interest rates are not too high) become doves is something I may talk about in my next update.