Do Defensive Stocks Indicate the Onslaught of a Market Crash?
A seasoned strategist and a few charts indicate that the market could be in for some tough times. The clue lies in the rise of defensive stocks.
Stock trading and investing involve a great deal of planning and a certain level of prediction. Ultimately, you always need to ensure you are ready for whatever the market throws at you. The opinions of experienced strategists and analysts can help you here. It is a negative situation such as a market crash that you need to be prepared for, but how accurately can such a scenario be predicted?
The fact that defensive stocks are leading the market is an indication that there could be bad times for the market and the economy, says The Leuthold Group’s chief investment strategist Jim Paulsen as reported by Mark Kokalowsky in this Investopedia article. The analyst believes that the stock market is supposed to be driven by economic masterstrokes of whole economic recovery. But the leadership of, what are called, defensive stocks indicate something is not quite right.
|ETF or Index||Gain From 6/1 Through 10/2|
|iShares U.S. Telecommunications ETF (IYZ)||10.4%|
|Consumer Staples Select Sector SPDR ETF (XLP)||10.8%|
|Vanguard Health Care ETF (VHT)||14.3%|
|Vanguard Utilities ETF (VPU)||7.4%|
|S&P 500 Index (SPX)||6.9%|
The above table by Yahoo Finance, mentioned by Mark Kolakowsky in Investopdia, compares the performance displayed by various defense-oriented ETFs recently to the S&P 500.
Paulsen analyzed the data of the stock market from 1948 to 2018 and found that defensive stocks showed strong relative performance before every recession that occurred during that period in the United States. The analyst first calculated the ratio of the returns in total of consumer staples stocks and utilities – including the dividends – to the S&P 500’s total returns. He then calculated the unemployment rate and used that as representing the economic conditions. The high unemployment periods were considered as indicating recessionary conditions.
According to figures from the US Bureau of Labor, in August the unemployment rate in the United States was 3.9% which was a slight rise from June’s rate of 3.8%. But it still is lower than any period since December 2000. According to Paulsen’s theory, defensive stocks could show relatively strong performance during low unemployment periods since they anticipate the peaking of the economy. Defensive stocks can also outperform at a time when unemployment reaches its highest, at a time of recession when you have quite a significant narrowing of the gap between the growth of defensive stocks and riskier stocks.
Investopedia’s Mark Kolakowsky turns to a Business Insider article that mentions some charts prepared by Gluskin Sheff, that indicate investors need to be wary as the markets turn fragile. One of these charts for 2018 depicts a double top for the S&P 500 that resembles the charts for the years of 2000 and 2007 before the bear markets started then.
Global debt is depicted at the highest level not only in relation to GDP but also in absolute terms.
Scheduled annual repayments of corporate debt for the United States are projected to rise to more than double the current level by 2020, as shown below.
There is also the possibility of an inverted yield curve.
And according to this Investopedia article, Morgan Stanley strategists report that returns for a variety of assets have been the worst in 2018 since 2008’s financial crisis. All these seem to point to a bear market heading this way.
But Paulsen doesn’t see the need for panic just yet solely based on his observations, but believes that investors need to move towards a more defensive approach with their portfolio. Kolakowsky also quotes Richard Bernstein, the seasoned investment strategist, as saying that there really aren’t any bear market signs but that the economy is continuing to display strength.
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