Equity Leaders and Laggards — Evening Brief – 06.21.24
The U.S. equity market has witnessed significant strength since establishing a key low in October 2023, largely driven by a massive rally in the technology sector. This upward trend has been widely supported by most other sectors as well. The consumer discretionary and real estate sectors, however, have been two sectors that have missed the rally.
The Communication Services Select Sector SPDR ETF XLC is the undisputed frontrunner. Undoubtedly, XLC, which includes prominent companies like Meta, Alphabet, and Netflix, has had a remarkable increase of 16.8% year-to-date.
The performance is not only impressive in terms of its absolute value, but it is also outperforming the whole market, as measured by the SPDR S&P 500 ETF Trust SPY, which has increased by 13.1%. XLC is the one sector that has outperformed the broader stock market in 2024.
The only sectors experiencing losses this year are consumer discretionary stocks, as measured by the Consumer Discretionary Select Sector SPDR ETF XLY, which recently hit its lowest level relative to the S&P 500 since February 2013.
Although equities with significant exposure to non-essential products and services have experienced a modest 1.4% increase this month, they have continuously underperformed the overall market in 2024. The XLY, with a year-to-date decline of 0.2%, ranked as the second worst performer among a group of funds that mirror the performance of the 11 sectors of the S&P 500 index this year.
At the same time, the Real Estate Select Sector SPDR ETF XLRE is down approximately 4.1% so far this year. XLRE holds commercial real estate investment trusts (REITs), which have faced challenges since the Federal Reserve embarked on a tightening cycle in early 2022. REITs are valued for their comparatively generous dividend distributions, but they have faced formidable competition from risk-free U.S. Treasurys recently.
Contrarians contend that REITs present an alluring opportunity for value-oriented investors. The XLRE’s trailing 12-month yield is 3.51%, as reported by Morningstar, and is a significant factor to consider. That’s around 80% of the current U.S. 10-year Treasury yield. Considering the possibility of an increase in the value of REITs after a challenging period, the overall prospects appear quite appealing.
Perhaps, but the technical picture for XLRE remains hazy. The ETF has rallied off its late 2023 trough, but the overall pattern still appears to be lacking strength. The prognosis would improve if it could surpass its current high of approximately 40. A breakout may be on the way in the near term, although expectations are confined to a trading range.
XLRE has tested its downside support of approximately 32 and has so far held – a sign that perhaps the worst may be over for REITs. A Fed rate cut would help the cause, but it’s not on the immediate horizon.