Waiting for the February jobs report..
Prepared by: Hisham Mukhaneh
Investors looking for safer areas in the US stock market have discovered that traditional havens, which held up in the sell-off last year, such as consumer staples, utilities and health care, may be more problematic this time around. Which prompted them to search for safety in the so-called
In “defensive names,” which usually earn strong profits, and in companies that can get through tough times.
Easy strategy
After a sharp rebound in January, the S&P fluctuated again. Investors fear that the Federal Reserve will raise interest rates higher than previously expected and keep them higher for longer to curb inflation.
“Hiding behind defensive stocks was a really easy and successful strategy last year, but I think this year is going to be more complicated,” said Anthony Sagalmben, chief market strategist at Amerprise Financial.
In the early weeks of 2023, that hiding argument softened due to evidence that the economy remains strong, as well as competition from assets such as short-term US Treasurys and money markets offering the highest returns in years.
Expensive evaluation
Sectors such as utilities are known as “bond agents” because they usually provide stable profits and security in the way government bonds did in the past. But when combined with the fact that some defensive stocks carry relatively expensive valuations, investors may avoid these sectors even if the broader market falters.
In addition, after “utilities”, “health care” and “consumer goods” maintained their stability amid the extreme markets last year, with a relatively slight decline amounting to about 1% to 3.5%, the three sectors recorded since the beginning of the year until now the largest losses for them. Among the 11 sectors in the “Standard & Poor’s” index, it fell by 8%, 6% and 3%, respectively, as of Thursday’s close.
Fears of a recession caused by the Fed’s rapid rate hike cycle hovered over markets last year, and investors gravitated toward defensive territory, confident that spending on medicine, food and other essentials would continue despite the economic turmoil. But recent strong economic data, including the positive January jobs report, adding 517,000 jobs, has prompted them to rethink expectations of an imminent downturn.
In turn, Matthew Miskin, chief strategist at John Hancock Investment Management, said: “If you look at the stock market, it tells you that there is basically no risk of a recession,” adding that “defensive name trading this year has been painful.”
Dividend returns
And while the health of the US economy will unfold further with the release of the highly anticipated February jobs report next Friday, investors will be watching Federal Reserve Chairman Jerome Powell’s testimony before Congress next Tuesday and Wednesday.
Meanwhile, high dividend yields have helped defensive stocks become a place to store money in turbulent times over the past decade, especially as traditionally safe assets have done little. Until this dynamic changed in 2021; Rising inflation and raising interest rates by the Federal Reserve pushed up cash and Treasury yields.
Last week, the utilities sector achieved an attractive dividend yield of 3.4%, basic commodities recorded 2.7%, and health care 1.8%. The US Treasury bond yields for six months amounted to about 5.2%.
But in some cases attractive reviews are also costly. The utilities sector is trading at 17.7 times forward earnings estimates, which is nearly 20% above the historical average for the stock. Commodities are also trading at 20 times the share price-to-earnings ratio, about 11% above the historical average. The price-benefit ratio for health care was 17 times, just below the historical average. However, the financial outlook for the sector is relatively weak this year, and healthcare earnings for the S&P are expected to decline by 8.3%, versus an increase of 1.7% for the overall index, according to Refinitiv data.
bond recovery
Certainly, there are other factors that could help cement defensive names’ prospects as safe havens within the markets. One example is the rebound in positive volatility in the bond market, according to Mark Hackett, head of investment research at Nationwide. Who said: «You can get a very attractive return in the bond market now, which was not the case in the past».
And if recession fears rise, as they did last year, defensive performance could once again outperform on a proportional basis, according to investors. Among them is Saglumbin of Amerprise Financial, when he points to bonds as a better hedge today than traditional defensive sectors.
The most important economic events for the current week:
Monday
10:00 Factory Orders
Tuesday
10:00 Testimony of the Federal Reserve Chair before the Senate
10:00 January wholesale inventory level
15:00 Consumer Credit Index
Wednesday
8:15 Employment data from ADP
8:30 US trade balance
10:00 Testimony of the Federal Reserve Chair before the House of Representatives
10:00 Employment Opportunities and Labor Turnover Survey
14:00 The “Beige” book report for the markets
Thursday
8:30 Unemployment claims
10:00 Speech by Federal Reserve Governor Christopher Waller
Friday
8:30 February jobs report
8:30 US unemployment rates
14:00 Federal Budget