Is a “hard landing” coming, economically speaking, as the Fed continues its most aggressive rate hike campaign in 40 years? Investors don’t seem to think so as investors continue to chase economically sensitive stocks despite the underlying economic deterioration. Such was a point made recently by Jesse Felder, noting:
“The cyclicals-to-defensives ratio has yet to really react even to the slowdown in the economy we have already seen over the past year or so as indicated by the reversal in the ISM Manufacturing PMI. If the latter continues to deteriorate in the months ahead, cyclicals (like the tech and consumer discretionary sectors) could have a great deal of pain still in front of them.“
His point is worth noting because investors have piled into stocks historically sensitive to economic changes. This year, however, has been a bit of a conundrum as the Energy sector, normally the most sensitive to economic weakness surged due to the Russia/Ukraine war, supply challenges, and political restrictions that keep oil prices elevated.
Such is notable because while corporate earnings have declined this year, much of the weakness is masked by the exceptionally strong results from the energy sector.
However, the risk going into 2023 is that those “cyclically sensitive” sectors catch down to economic realities as the impact of the Fed’s rate hikes begins to affect consumers.