Although the S&P 500 and Dow Jones Industrial Average have seen new highs this year, some areas within the stock market aren’t participating in the rally.
Small cap ETFs, for example, linked to the Russell 2000 (IWM) and S&P SmallCap 600 (IJR) continue to lag the broader market. Investor risk appetite for higher beta/higher risk small cap stocks is waning, which partly explains why they aren’t leading the market.
Elsewhere, the homebuilding (ITB), retailing (XRT), and regional bank (KRE) industry sectors have not participated in the 2014 rally to new highs. Why does this matter? Because performance divergences, especially in key industry sectors, are either supportive or non-supportive of the broader stock market’s move.
Furthermore, it would be a mistake to overlook the importance of homebuilders, retailers, and regional banks not just for the stock market, but the broader economy.
Consumer spending accounts for roughly two-thirds of national GDP and a robust housing market is central to any economy that’s alleged to be growing.
Although consumer stocks (XLY) have trailed the S&P 500, consumer confidence according to the Conference Board, hit 90.9 in July–its highest reading since the onset of the Great Recession in October 2007. Of course, how finicky consumers feel today is a lagging indicator, but it’s still better to see them in a generally happy mood.