The S&P 500 experienced its first monthly decline since last fall in April, and the Industrials sector was no exception.
The Industrials have come off their highs, but the decline hasn’t done any significant damage to the longer-term uptrend that’s been in place for the last 18 months. While former leaders like Tech are stuck trading below former targets, the Industrials are consolidating above theirs.
The underlying strength in the Industrials reflects underlying strength in the stock market overall. No sector is more highly correlated to the S&P 500 than the Industrials, a statistic exemplified by the performance since the bear market lows back in October 2022. Since then, the Industrials have tracked the SPX almost perfectly.
Owning the Industrials over the benchmark index hasn’t given investors much of an edge - they’ve tracked each other step for step - but below the surface, it’s a different story. If you strip out the outsized influence of market cap weightings and look instead at the equally weighted versions, the Industrials are setting new relative highs. Ever since breaking out of a 2-year base in early 2022, this ratio has been stair-stepping steadily higher.
The further you dig, the better things get. Check out the ratio of the small cap Industrials relative to the S&P 600. A breakout from a 10 year base has turned into an asymptotic rise. Every time we see this chart, we have to double-check the settings to make sure we still have the y-axis set to log scale.
Can the recent relative strength continue? Of course. We never want to discount the odds of a trend continuing.
But we’re also entering the worst seasonal period of the year for the Industrials relative to the rest of the market. Since 1990, the sector has underperformed on average in each of the next 6 months.
For the Industrials/S&P 500 ratio, ‘sell in May and go away’ has worked out pretty well.
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