Evening Brief – 02.01.24
Risk On
Despite geopolitical risks, the financial markets remain in a “risk-on” mood, with positive trends prevailing in several big-picture perspectives.
Examine the US equity market, using the SPDR S&P 500 ETF (SPY) versus the CBOE Volatility Index (VIX). The SPY is trading at record highs, while the VIX is trading around its lowest level in three years, indicating that investors have yet to become concerned about the escalating Middle East crisis, which has the potential to disrupt the energy markets and is already causing problems for global shipping.
At the same time, the relative performance of semi-conductor stocks, as measured by the VanEck Semiconductor ETF (SMH), reached a new high last week before pulling back a bit over the last three days. A strong performance in the semiconductor industry usually indicates optimism about broader economic prospects.
Another risk-on indicator is the relative performance of housing stocks, as measured by the SPDR S&P Homebuilders ETF (XHB) versus the SPY. The XHB/SPY ratio is trading at nine-year highs, suggesting the housing market is outperforming the broader market.
Meanwhile, the bond market highlights a divergence in market sentiment between the risk-on mood observed in other asset classes.
Measuring this appetite using a long-term Treasury ETF (iShares 20+ Year Treasury Bond – TLT) and a short-term Treasury ETF (iShares Short Treasury Bond – SHY) indicates that fixed income investors are now preferring safer assets while adopting a more conservative approach.
The markets are not immune to geopolitical risks, but for now investors continue to look beyond them.