We’re reminded again of the old adage that stocks fall in value much faster than they gain in value. The stunning in drop in various financial markets in the past few months, paired with a rapid plunge in bond yields, has led many investors to adopt a much more cautious stance.
The markets appear to be responding to a growing set of economic reports that point to a slowdown in economic growth. For example, home sales plunged seven percent on an annual basis in November, the fastest drop since 2011. Auto sales are coming off their peak, global trade flows are weakening and confidence in the executive suites is waning.
A recent survey conducted by the Duke University/CFO Global Business Outlook found that nearly half of the chief financial officers interviewed predicted the U.S. economy will enter in a recession in 2019. That figure swells to 80 percent when asked if that will happen by 2020.
Still, not everyone is convinced the economy will stall out in 2019.
“The underlying economic data don’t yet anticipate a recession, though there is clearly a visible slowdown in growth,” says Todd Sunderland, head of risk management and quant strategies at Cushing Asset Management. He notes the sharp drops in stocks and commodities underpin the “palpable fear” in place right now.
Some observers are concerned that fear could become its own negative catalyst.
“If the market continues to sell-off, that could impact consumer and corporate spending,” says Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors. His firm recently issued a 2019 outlook for ETFs that noted frayed US-China relations, less accommodative monetary policies and slowing earnings growth have investors on edge.
While Bartolini agrees with Sunderland that it’s premature to predict an imminent recession, he suggests investors may gravitate towards traditionally defensive sectors such as consumer staples, healthcare and utilities.
It’s interesting to note that “credit-like” equities such as utilities have come back into vogue. Until a few months ago, a rising interest rate environment led many investors to shun rate-sensitive sectors like utilities. Not anymore. The Utilities Select Sector SPDR Fund (XLU) has managed to rally more than three percent in the fourth quarter, a rare bit of green on red trading screens.
This fund, which has a 0.13 percent expense ratio and $8 billion in assets, offers a 3.3 percent 30-day SEC yield. That’s above the comparable yield offered by a 10-Year Treasury Bill.