Recession Fears And The Stock Market Is It Too Late To Play Defense

But first, how big a concern is a recession? Google searches for the term have steadily increased, according to trend data from the search giant presented below: Google Fear is understandable. While the labor market remains resilient, four-decade high inflation is causing consumers to fall into the trash, according to sentiments. The Fed is playing catchup The Federal Reserve appears to be belatedly trying to tighten monetary policy at a dizzying pace – including the possibility of multiple, oversupply of interest rates by half a percentage point. She is also considering a much faster drop in her balance sheet than in 2017-2019. Fed officials, of course, say they are confident they can tighten policy and reduce inflation without the economy collapsing, achieving what economists refer to as a “soft landing.” There are prominent skeptics, including former Treasury Secretary Larry Summers, whose early warnings of rapid inflation have proved prophetic. Keywords: Recession is now the “most likely” outcome for the US economy, not a mild landing, says Larry Summers The eyes on the curve And then there is the yield curve. The yield on the 2-year bond TMUBMUSD02Y, 2.451% was briefly traded above the yield on the 10-year bond TMUBMUSD10Y, 2.829% earlier this month. A more prolonged reversal of this measure of the curve is considered a reliable indicator of recession, although other measures that have proven even more reliable have not yet flirted with reversal. Read: US recession rate ‘still not flashing red’, says leading curve researcher The yield curve, even when flashing red, is not a very indicator of timing for stocks, analysts said, noting that the period between the onset of the recession and the peak of the market can take a year or more. . However, his behavior attracts attention. Shares, meanwhile, stumbled last week, falling to four days on Good Friday as the 10-year bond yield rose to its highest level since December 2018, Russia’s brutal invasion of Ukraine continued and major banks reached the profit season in a mixed start. You should know: Risk of default, commodity shocks and other things for investors to remember as the war in Ukraine enters a new phase The Dow Jones Industrial Average (DJIA) fell 0.8%, the S&P 500 SPX fell 2.1% and the Nasdaq Composite COMP, heavily weighted on tech-sensitive technology and other growth stocks, fell 2.6%. I’m becoming a defender Although only time will tell if a recession is approaching, the stock markets that perform best when economic uncertainty is on the rise have already significantly outperformed the wider market. “During times of macroeconomic uncertainty, some companies / industries outperform simply because they have less risky businesses than the average S&P,” said Nicholas Colas, co-founder of DataTrek Research, in an April 14 note. US utilities, consumer commodities and healthcare – often described as the main defense sectors – have surpassed all performance of the S&P 500 SPX, -1.21% this year and the last 12 months. The S&P 500 was down 7.8% year-on-year through Thursday, while the utility sector was up 6.3%, commodities were up 2.5% and healthcare was down 1.7%. Colas dived deeper to see if these sectors performed better than a normal amount for this segment of the market. It looked at 21 years of annual performance data for each sector, a measure of each group’s performance against the S&P 500 over the previous 253 trading days. Results:

    Utilities showed an average annual relative return on the S&P 500 from 2002 to date minus 2.8%.  The 9.9 percentage point overperform in the last 12 months to Wednesday was just over a standard deviation from the long-term average.         Staples has averaged an annual return of minus 2.2% over the S&P 500 over the past 21 years.  The performance of 7.6 percentage points in the last 12 months was just less than a standard deviation from the long-term average.         Healthcare recorded an average annual yield of 0.7% over the S&P 500 in the long run, while the last 12 months of overperformance (10.7%) was just over a standard deviation from the long-term average.     

Space for running? Such strong numbers could reasonably give the impression that these sectors can perform better, Colas said. But, in fact, their outperformance was even stronger in previous periods of macroeconomic uncertainty, with all three surpassing the S&P 500 by 15 to 20 percentage points. “Unless you are very bullish on the US economy / world economy and corporate profits, we suggest you consider putting these defense teams first,” he wrote. “Yes, everything has worked, but it has not yet been extended if the US / global macroeconomic landscape remains volatile.” Upcoming sights The big Wall Street banks offered various results to start the profit season, which is in full swing next week. Highlights will include results from electric car maker Tesla Inc. TSLA, -3.66% on Wednesday, with investors also worried about whether CEO Elon Musk will face distractions as it continues its bid for Twitter Inc. TWTR, -1.68%.
The financial calendar includes a series of housing data at the beginning of next week, while the anecdotal summary of the financial conditions of the Beige Book of the Federal Reserve is expected on Wednesday afternoon.