Alarms are sounding all over Wall Street.
Over the last several weeks, tech and utility stocks both exhibited strong momentum. This is highly unusual because tech stocks and utility stocks tend to diverge. Technology is a risk-on sector, while utilities is a risk-off sector. Tech stocks thrive when investors are willing to take on greater risk for the potential of greater returns and growth. Utilities stocks tend to thrive during times of market duress as investors seek safety.
But for a moment in time, tech and utility stocks were moving together.
Experts argued that this was happening because of the sudden realization that artificial intelligence (AI) uses electricity. This would allow for tech stocks to keep outperforming while also lighting a fire in utility stocks.
However, there are other alarms sounding. Gold, the classic safe-haven investment, has risen meaningfully in recent months. Treasurys are starting to show signs of risk-off behavior too.
So, what comes next?
I think the narrative will shift again and mainstream financial media will turn attention back to yield curve inversion. The yield curve inverts when long-term debt instruments yield less than short-term debt instruments. This inversion is a warning sign of a recession. A rapidly worsening inversion leads people to believe that a recession is imminent. This could explain why utility stocks and tech stocks have been leading. Investors may be eyeing the yield curve and preparing for something bad to happen. Moving into utilities – a defensive sector – allows for a repositioning.
The combination of all these alarm bells suggests that investors are starting to position their portfolios for higher levels of safety. The early signs of this flight to safety are clear, even if it is still in the very early stages of unfolding. The fact that utilities, Treasurys, and gold have all shown signs of strength simultaneously is no coincidence.
I think this all ties back to Japan. As I wrote this week, it is bad news that Japanese financial authorities failed to stabilize the yen. I think slowly, then suddenly, it will be clear that the market is extremely vulnerable to this global currency risk. Complacency will then be punished.
Get ready for volatility to make the biggest comeback since Lazarus.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
