- Investors are hedging their bets amid fears of a recession, driving a sell-off in the stock market.
- Weak economic data, including rising unemployment, has fueled fears of a recession.
- Investors are responding by stockpiling defensive and dividend-paying stocks, as well as government bonds.
The playbook for a stock market crash continues as panicked investors suddenly look to risk their portfolios for fear of a crash.
The major equity indexes have been in free fall for three days running, with sales due to weak economic data. Investors are questioning whether the Federal Reserve waited too long to cut interest rates and whether it was too late to prevent a recession. As indexes remain deep in the red, with the Nasdaq-100 in correction territory, calls for a sudden cut are gathering steam.
But that doesn’t mean every market area is being hit. While the S&P 500 is down 5% since Thursday, three sectors of the benchmark index remain in the green: real estate, utilities and consumer goods. Considered safe plays in times of market turmoil, they have gone above and beyond investors’ nerves.
The same is true of ultrasafe bonds. US Treasury yields remain low year after year as investors play it safe and run into government debt.
Below are four of the best market areas that make it clear that investors are using the economic playbook:
1. Defensive stocks
Investors invest in defensive stock sectors, such as consumer staples and utilities, which tend to perform well during economic downturns.
As of Thursday, the consumer-staples and utility indexes in the S&P 500 are up 0.7% and 0.3%, respectively. Divided by real estate, they are the only areas of the benchmark index that have gained in the last three trading days, with all other areas of the market posting losses of up to 10%, according to Bloomberg data.
“With US economic growth set to slow in the second half of 2024 and 2025, investors are looking to the stability of defensive stocks to position their portfolios to withstand any potential downturn there,” David Sekera, US manager. market strategist at Morningstar, he said in a recent note.
2. Documents paying dividends
Stocks that pay dividends to shareholders, another common play in recessions, are also on the rise.
Utilities funds, which tend to pay dividends, have outperformed the S&P 500 as a whole in the past few trading days, while the iShares Global Utilities ETF is up 12.7% from year-to-date levels.
3. Government Obligations
US Treasurys saw a strong rally on Monday as traders anticipated a rate cut – a policy move that is usually a sign that the Fed is responding to recession risks.
Treasury yields, which fall when government-bond prices rise, hit their lowest level in a year on Monday. The 10-year U.S. Treasury yield was down nearly 10 points in morning trade, while the two-year U.S. Treasury yield was down 16 points.
“Bonds see a need for a safe haven,” David Rosenberg, chief economist at Rosenberg Research, said in a note on Monday. “For the big bulls out there, I have news for you: the bond market is telling you that something bad is about to happen,” he added later.
4. Selling high growth products
Investors, meanwhile, are shedding high-growth products – in particular, technology – from their portfolios. The Nasdaq deepened its decline into correction territory this week, with the technology index losing 12% over the past 30 days.
The S&P 500 information technology index has fallen 9% over the past three days.
“The tech bubble, like it was in 2000 (and it wasn’t just about the dot-coms back then, but the whole industry being swept away by the Internet as was the madness of AI), is in the process of emerging,” Rosenberg wrote. “As we saw with routers, cable, and fiber optics in the late 1990s, AI investment concerns are now starting to build, and the parallels are clear.”
However, some forecasters say the outlook for a recession remains uncertain. While a slowdown in the labor market appears to be taking place, the weakness in the latest employment report may have been exaggerated due to recent weather events, which displaced workers. about 416,000 temporarily, Ned Davis Research said.
“Next year’s prices are reasonable if the US economy falls down and / or inflation falls below the Fed’s target of 2%,” analysts said of expectations to reduce the rate of the market. “Even if we can get there, it’s not our call at this point.”
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