We're seeing a notable sentiment shift happening right now in the equity markets and it's largely being driven by the post-Fed meeting statement delivered by Jerome Powell. His comments indicating that the QE taper is likely on track for later this year, expected to wrap up by the middle of 2022 and be followed with interest rate hikes as soon as Q4 2022 was met with a positive reaction instead of the usual sell-off that has come with notes of hawkishness.
This resulted in a rally in cyclicals, financials and energy in particular, and move away from some of the traditional growth vehicles, tech is taking a hit thanks to higher interest rates, and defensives. The defensive part of the equation is interesting because throughout the past few months many of the individual sectors have had their moment in the sun. Utilities performed well for a while. Healthcare had a nice run when investors pivoted more broadly to defense about a month or two ago. Even consumer staples, a sector which has consistently underperformed since the COVID recession bottom, had a couple of brief pops. Not this time around, though, since all defensive sectors have lagged the market.
ETF investors have responded similarly. They've plowed their new money into cyclical sectors and away from defensives pretty decisively.
Using the SPDR sector ETFs as the benchmark, financials, industrials and energy have taken in a combined $2.3 billion of net new money in just the past five trading. The three sectors firmly in the red - healthcare, utilities and consumer staples - have shed a combined $1.3 billion.
There's certainly still room for this cyclical rally to run. If higher Treasury rates can stick, banks can improve their net margins and profitability. Higher rates may impact loan activity, but they're still the single biggest factor that could fuel a further rally. On the energy side, the current supply crunch should support higher crude oil and natural gas prices throughout the winter. An especially cold winter would also work in this sector's favor. Could we see $100 oil in the near future? Probably not likely, but I wouldn't rule it out altogether.
Investors certainly appear to be getting more bullish on cyclicals here and could provide the fuel to keep pushing prices higher.