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Recession-Proof Stocks Are Leading the Market’s Latest Leg Up
Stocks rebounded from a difficult April, led by two sectors that typically outperform when the economy is in recession.
Since April 16, when the S&P 500 (^GSPC) hit its recent bottom, Utilities (XLU) led the charge, rising almost 12%, representing all the sector’s gains in the year to date. Consumer goods (XLP) stocks are up nearly 5% over the same period, while the S&P 500 is up about 2.7%.
Wall Street strategists said both sectors are likely recovering after a dismal performance in early 2024.
Given that both sectors were among the worst performers in the S&P 500 last year, Truist co-CIO Keith Lerner argued that there is one aspect of the change that is simply the rotation of investors into an area that has not yet participated much in the recent market recovery. .
The utilities sector entered March at the biggest discount to the S&P 500 from a valuation standpoint (using a forward price/earnings ratio) since 2009, according to Lerner. However, consumer staples have underperformed the S&P 500 by nearly 30% over the past year. This presented a potential buying opportunity in both traditionally “defensive” sectors.
“With markets as high as they have been since October, people get nervous,” Lerner told Yahoo Finance. “They want to move to something a little more defensive, make some profit… It’s also just saying, ‘Hey, what didn’t work and what could have an opportunity to recover or hold up better if the market is right?'”
There were clear fundamental factors that explained why the utilities would accept a bid last month. The sector’s revenue grew 26.7% this quarter compared to the same period last year. That’s the second-highest growth rate of any sector, according to FactSet. And there is growing conversation around how increased interest in projects involving artificial intelligence and electric vehicles could increase demand for electricity for companies in the utility sector.
There were also several macrocatalysts at play. The rise in the utilities sector, an interest rate-sensitive sector, came as investors digested the Fed’s message last week that another rate hike is unlikely. This sent the 10-year Treasury yield (^ TNX) is down about 20 basis points from its 2024 high, providing relief for a sector that has typically fallen as yields have risen over the past year.
Another important movement occurred in economic data. After economic growth continued to surprise Wall Street at the beginning of the year, the data changed in April, highlighted by a weaker-than-expected employment report and contraction in manufacturing activity in the month.
The story continues
And while this doesn’t mean the US economy is definitely slowing down, it has caught investors’ attention. Morgan Stanley Chief Investment Officer Mike Wilson wrote in a weekly note to clients on May 5 that investors “may want to consider some exposure to defensive sectors like utilities and consumer staples” if industrial data remain weak.
Utilities and consumer staples were two S&P winning sectors last month. (Photo by Spencer Platt/Getty Images) (Spencer Platt via Getty Images)
But the rise in the public services and basic consumer goods sectors will not necessarily continue.
Charles Schwab senior investment strategist Kevin Gordon told Yahoo Finance that he’s not sure the defensive play will have staying power because when you look at what’s been leading the market since the beginning of March, there are several different stories at play. . Communications services’ (XLC) The increase in recent months shows a tilt toward growth, Gordon said. Energy (XLE) would be cyclical. However, the recent rise of public services points to a defensive attitude.
All three sectors are now the top performers in the S&P 500 this year.
“It doesn’t send me a clear message about whether markets are risky or not,” Gordon said.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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