Materials Sector Holds Steady as Markets Fall on Hot Inflation Report

Following a hotter-than-expect inflation report, the materials sector is holding steady while the rest of the market falls.

The personal consumption expenditures price index — the Fed’s preferred measure of inflation — showed inflation increased in January, rising 5.4% from a year prior and up from 5.3% in December, the Commerce Department’s Bureau of Economic Analysis reported on February 24.

In afternoon trading on Friday, the S&P 500 is down 1.3%, with all sectors posting losses except for materials, which is up a modest 0.2%. Meanwhile, the Nasdaq is down over 2% and the Dow Jones fell over 1%.

The materials and energy sectors are expected to perform well during a slowdown, as the positive output gap during this phase tends to lead prices of oil and basic materials higher and contribute to profitability. The boom of commodity prices during U.S. economic slowdowns has occurred less frequently since the 1980s, however, as these markets have increasingly become integrated with the global market.

While materials may have become less sensitive to the overall U.S. economic cycles, the sector is now more impacted by global economic conditions. As the U.S. economy has become more service-based and less reliant on resource-intensive production. global manufacturing has shifted to Asia, driving flows of natural resources to that region.

Investors looking to overweight the materials sector in their portfolio may want to consider an equal weight approach such as the Invesco S&P 500 Equal Weight Materials ETF (RTM). Not only is RTM outperforming its cap-weight counterpart year to date, but an equal weight strategy mitigates concentration risk, reducing the impact a small group of large companies can have on the overall index.

Year to date, RTM has increased by 4.48% compared to the cap-weighted sector’s 3.93% gain according to YCharts.

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