Industrial Stocks: Mean Reversion in the Making?
The Industrial sector has lagged in 2020. That could be about to change.
Underperformance by industrial stocks is nothing new – the sector has been in a relative downtrend vs. the S&P 500 Index since 2016 – but when the coronavirus crushed the global growth outlook, the Industrials took a disproportionate hit. Look how the ratio broke its 2019 lows and has accelerated downward this year:
But with each new low since March, momentum has shown steady improvement. That could be a sign that Industrials are set to outperform in the near-term.
Reinforcing that idea is the chart below, comparing the Industrial sector to the S&P 500 on an equal-weight basis. This ratio has performed better than its cap-weighted counterpart in recent years, having held support at the 2016 highs 3 times during 2018. That key level is proving supportive once again, and momentum is staying out of oversold territory. This isn’t an uptrend, but it doesn’t look like a downtrend either.
For both the cap and equal-weighted ratios, a mean-reversion bounce from these levels seems a reasonable outcome – and the mean is significantly higher. But whether that mean reversion is the start of a new relative uptrend in the cap-weighted Industrials is a question for a later day. For now, that trend is still down.