Cyclical stocks, so-called because they’re connected to the ebbs and flows of the economy, have enjoyed impressive gains of late. The rally is showing signs of petering out, however, and in order for it to continue, certain events need to go smoothly.
A host of cyclicals have bounced. The
SPDR S&P Metals & Mining
exchange-traded fund (ticker: XME) is up about 14% on optimism about economic demand from late May when it reached a low for the year. The price of copper and finished metal products have gained with the ETF.
The
Energy Select Sector SPDR
ETF (XLE), which counts oil majors such as
Chevron
(CVX) as holdings, is up about 6% from its May low, as the price of oil has risen. The
Industrial Select Sector SPDR
ETF (XLI), home of heavy-equipment makers such as
Caterpillar
(CAT), is up about 10% from its May low. It also includes airlines and transporters. The
SPDR S&P Bank
ETF (KBE) is up around 13% from its May low, as banks make more loans and collect more fees for deal making when demand rises. Plus, the market has realized that many large banks are beneficiaries of the recent banking turmoil.
The overarching driver of optimism stems from expectations that the Federal Reserve will soon pause its interest-rate hikes, with inflation ebbing. That’s why they expect a stabilization in economic demand. So commodity prices have bounced, and so could volumes of goods and services.
Still, it isn’t time yet to claim victory for cyclicals. Most are hitting “resistance,” or prices at which sellers come in to knock shares lower. Other names are seeing gains slow.
Copper prices have stalled, and the mining ETF, at just over $50 a share, could run into resistance in the low-to-mid $50s, where sellers have knocked it lower many times since last spring. The price of oil per barrel has had trouble moving above the low $70s recently, so the energy ETF, at just over $80 a share, still hasn’t moved above the $80s, where sellers have knocked it down several times since August 2022.
The industrials ETF is near $107 a share, which it last closed at early last year. That’s a positive sign for the sector, but the growth is moderating; the ETF is up less than 1% Friday, compared with an upside day in early June when it gained almost 3%. That may mean the amount of selling is catching up to that of buying.
The bank ETF, at just over $36 a share, saw sellers knock them down near $38 in early June. Shares are still up double digits in percentage terms, below a high for the year, but growth is slowing. Shares are up less than 1% Friday, versus a 5% gain one day in early June.
The waning enthusiasm for these stocks comes as the picture around the globe looks decidedly less bullish than the U.S. outlook. These stocks already reflect the optimistic economic possibilities at home, but central banks around the globe are still lifting rates. Inflation in the U.K. is still above 8%, and the Bank of England recently hiked rates. The European Central Bank also hiked a few days ago. That means the market still expects more economic pressure to come in these economies.
China has been slowly lifting mobility restrictions, but with stops and starts. To be sure, the People’s Bank of China has plowed trillions of dollars into that country’s banking system this year. China’s demand, however, remains restricted, and that hurts demand for oil and copper, commodities that China is a large buyer of. This is unfortunate news for
S&P 500
cyclicals, which see much of their sales from overseas. Caterpillar and Chevron see a majority of sales from outside the U.S., while
FedEx
(FDX) sees about a third from overseas, and the majority of
Citigroup
‘s (C) business is foreign.
That’s why any pullbacks could present buying opportunities. At some point, central banks will stop lifting rates, and economic activity in Europe and Britain will stabilize. China should eventually fully reopen, while the stimulus will eventually kick in.
It’s best for investors to use the volatility to their advantage, which means buying on substantial dips.
Write to Jacob Sonenshine at [email protected]
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