Curious as to where the "Weight of the Evidence" stacks up across asset classes as we wrap up the first quarter and begin the second half of 2025?

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Real Estate has been one of the market’s biggest laggard for some time, but movement this month saw the sector move ahead of the Consumer Staples group in our DALI rankings. Given Real Estate's recent uptick in rank, should we take the move as a sign of brighter things to come? 

While the sector did technically move up in rank, the move was driven more by weakness from Consumer Staples than strength from Real Estate. Since the start of July, Real Estate has actually fallen three signals in DALI, but Staples saw further downside for it to lose eight signals. Investors would need to look back to 2022 to find the last time that Real Estate ranked higher than 7th in DALI’s rankings, highlighting the sector’s long-term lack of relative strength.

Looking at the Real Estate Select Sector SPDR Fund (XLRE), it continues to trade in a negative trend and holds a weak fund score of only 1.73, which is 1.92 points lower than the average US fund. It has only been on a market RS sell signal since 2013, further showcasing its lack of long-term strength. XLRE faces significant resistant overhead resistance at $42, in addition to its bearish resistance line. Overall, the representative and broader sector have yet to show signs of material improvement from their weak positions.

Avoiding a sector entirely is often unrealistic, so those needing exposure from weaker sectors should look towards select areas of strength within the broader group. The NDW buy list provides strong names within each major sector, including weaker areas like Real Estate or Consumer Staples. One example of an actionable name from the buy list is Welltower (WELL), which is a strong 5 for 5’er in the top decile of its sector matrix. The stock is on a string of three consecutive buy signals and is within striking distance of setting new all-time highs. WELL is trading in actionable territory relative to its 10-week trading band with support nearby starting at $150. Note that earnings are due on July 28th. 

Investors willing to look outside the US might find higher relative strength Real Estate exposure from international equities given the weakness of the US dollar (DX/Y). A declining dollar boosts the value of foreign assets by making them worth more in dollar terms, which has been a tailwind for international real estate. The Vanguard Global ex-US Real Estate ETF (VNQI) holds a strong fund score of 4.45, which is 2.01 points higher than the average Real Estate fund. The fund lacks traditional support on its default chart until $38, but the more sensitive $0.25 scale seen below reveals support at $42.75 while previous resistance in the low $40s could serve as future bounce points. 

For most of 2025, there have been expectations that the Fed is going to lower interest rates. Thus far, however, those expectations have not been realized as the Fed funds rate has been at its current 4.25-4.5% target since December of last year. While the market has gradually extended its timeline, it has not given up on a reduction in 2025. Currently, the fed futures market is pricing in about a 55% chance that the Fed will cut rates in September. But the odds of a September cut have fallen noticeably over the last week despite June CPI coming in largely in line with expectations.

As to why the odds of a September cut have fallen recently despite the relatively low June CPI number, the explanation may be that there are signs that, while it remains low, inflation may be turning higher. Goods inflation has been ticking higher over the last few months, and several measures of underlying inflation have recently turned higher. These data point are just a possible sign that inflation could be rebounding, and at this point, the market is still pricing in a better than 50% chance of September cut. However, the possibility that inflation could be on the upswing combined with a Fed that seems to be in no hurry to act given the resilience of the economy, may be causing investors to question their timeline once again.

While the timeline has been adjusted several times, the market has been consistent in its expectation that the Fed will lower rates in 2025. Despite this, longer-term rates have not fallen meaningfully as the 10-year yield index (TNX) is currently trading near where it was at the end of last year and except for a quick dip in April, TNX has not fallen below 4% this year. Fed policy does not directly impact the long end of the curve, but long-term yields reflect where the market expects short-term rates to go. This is why inversion of the yield curve is considered a sign of recession – it reflects an expectation that short-term yields are going to fall in the future. By that logic, it’s not unreasonable to think that when the market is expecting the Fed to cut rates, it would be reflected in long-term yields, but that has not happened. Aside from uncertainty about when the Fed will finally act, concerns about the US debt, which have been at the forefront this year, may be helping to keep yields higher.

Whatever the exact cause, the upshot is that, as has been the case quite often since 2022, strength in fixed income lies outside the core US market. Global and non-US groups have been one of the most reliable areas of strength in fixed income this year as the dollar has trended lower virtually all year and these groups still account for five of the top 10 groups in the Asset Class Group Scores fixed income rankings. Recently, however, convertible bonds have moved to the top of the rankings and show the highest score direction of all fixed income groups in the system.

If you’re unfamiliar with convertible bonds, they are hybrid securities with features of both debt and equity. They give the bondholder the right, but not the obligation, to exchange the bond for a pre-determined number of shares of the common stock. In a situation where the underlying equity value of a convertible bond is higher than its conversion price the bond will generally trade much like equity, i.e., the price of the convertible bond rises and falls with the stock price, so convertible bonds will often perform well when the equity market is strong, even in an unfavorable interest rate environment, making them a good option for markets like this one. It is worth noting that because of their equity-like characteristics, convertibles can be significantly more volatile than traditional bonds and they can reduce the diversification benefit of your fixed income portfolio, so you will probably want to limit your level exposure.

Overall, the fixed income market seems to be at something of a crossroads, inflation has come down enough that the fed could lower rates, but with the uncertainty surrounding tariffs and a relatively strong economy, they have been content to sit on their hands. It may take a noticeable economic shift – like a significant upswing inflation or a major weakening of the labor market to shake things loose. But at present, relative strength continues to lie mostly with non-core groups like international fixed come, high yields, and convertibles. For those looking for safety in fixed income, short duration Treasuries and investment grade bonds are probably the best option as a one-year Treasury is currently yielding more than the five-year bond.

Daily Option Ideas for July 17, 2025