I think in our current macro regime, we need to look one level deeper to understand traditional asset class correlations. E.g. utilities outperforming due to AI energy use, gold breaking correlation with dollar due to China buying. There seem to be a lot of idiosyncratic situations going on simultaneously.
Your chart does not indicate CPI outperforming Utilities. Simply dividing CPI index by XLU price has no practical meaning. You should look at inflation adjusted returns of XLU, which is around 4% since 2015.
XLU tends to underperform SPY over the long term in terms of absolute returns, as it is a defensive play, but the upside of this is that XLU tends to be less volatile, see for example its performance in 2022. XLU's recent underperformance is indicative of the risk on mentality in the market as investors ditch defensive plays in pursuit of growth stocks, which is not surprising given that US economic growth has been stronger than expected. However as they say past performance is not indicative of future returns. The value of XLU is its defensiveness and relatively low correlation to the market, which adds diversification to a portfolio.
But like you said (which I agree) past performance is not indicative of future returns. XLU broke its correlation with commodities in 2020, or it might be better to say that growth stocks, via Mag 7 and buybacks recycled massive liquidity into the indexes and possibly Bitcoin (to take heat off commodities) and now that looks to be a failing strategy as commodities remain strong led by precious metals, while US real GDP has fallen to be half the rate of inflation. Something has changed....the super cycle in commodities is driven by growth in EM’s and the non-dollar trade in this new cycle is perhaps suppressing the tribute paid to the US dollar, Inotherwords, dollars are non-depreciating in a higher commodity cycle, exporting less inflation to the periphery than it normally would.
While I think your thesis makes sense, industry activity matters more for direct positioning, i might contend that the macro story is what will help inform the industries to be considering
I think in our current macro regime, we need to look one level deeper to understand traditional asset class correlations. E.g. utilities outperforming due to AI energy use, gold breaking correlation with dollar due to China buying. There seem to be a lot of idiosyncratic situations going on simultaneously.
Re utility electricity inflation via R Friedland https://x.com/robert_ivanhoe/status/1790476569099550891?s=61&t=PHw_uwJPgu_EiRms4Oe2Sw
And CPI outperforms Utilities despite recent rally.
https://schrts.co/uuQmIajj
Your chart does not indicate CPI outperforming Utilities. Simply dividing CPI index by XLU price has no practical meaning. You should look at inflation adjusted returns of XLU, which is around 4% since 2015.
To expand on my point, XLU has been underperforming SPY:
https://schrts.co/fbzhfDhx
SPY just made a new high relative to CPI (lag):
https://schrts.co/curZIXnQ
XLU is in a bear market relative to CPI (lag):
https://schrts.co/usqTVIUJ
If XLU is a defensive play its should outperform SPY
If XLU is a growth play, it has some catching up to do.
I’m just using CPI as a relative comparison to the performance of XLU and SPY
I think utilities make a good inflationary and broader market hedge from here.
XLU tends to underperform SPY over the long term in terms of absolute returns, as it is a defensive play, but the upside of this is that XLU tends to be less volatile, see for example its performance in 2022. XLU's recent underperformance is indicative of the risk on mentality in the market as investors ditch defensive plays in pursuit of growth stocks, which is not surprising given that US economic growth has been stronger than expected. However as they say past performance is not indicative of future returns. The value of XLU is its defensiveness and relatively low correlation to the market, which adds diversification to a portfolio.
XLU tends to outperform SPY in a commodity super cycle:
https://schrts.co/NqXknpDp
But like you said (which I agree) past performance is not indicative of future returns. XLU broke its correlation with commodities in 2020, or it might be better to say that growth stocks, via Mag 7 and buybacks recycled massive liquidity into the indexes and possibly Bitcoin (to take heat off commodities) and now that looks to be a failing strategy as commodities remain strong led by precious metals, while US real GDP has fallen to be half the rate of inflation. Something has changed....the super cycle in commodities is driven by growth in EM’s and the non-dollar trade in this new cycle is perhaps suppressing the tribute paid to the US dollar, Inotherwords, dollars are non-depreciating in a higher commodity cycle, exporting less inflation to the periphery than it normally would.
While I think your thesis makes sense, industry activity matters more for direct positioning, i might contend that the macro story is what will help inform the industries to be considering