Due to their respective stellar performances in the equity market this year, some market watchers believe that the consumer staples and utilities sectors may have peaked. But one Fidelity investment strategist disagrees.
Denise Chisholm, a sector strategist at Fidelity who spoke Thursday at the Morningstar ETF conference in Chicago, said defensive sectors like utilities and consumer staples typically outperform during earnings recessions, similar to the current situation.
“You can say they’ve outperformed a lot, but we’re only a third of the way there in terms of relative performance in a typical profit recession,” she said.
Considering these two sectors are off of their highs from earlier this year, they may not be overbought, she added. Additionally, if earnings fall for the broader market the relative earnings growth of these sectors, which are relatively stable, offsets the compression in the broader market.
“The irony is … you should not necessarily sell them when they’re expensive. I think that whole theme has potentially longer to play out,” Chisholm said, adding that sector ETFs make it easier for financial advisors to make plays on different investing themes.
Michael Arone, managing director at State Street Global Advisors, said there is some mistrust of the equity rally because the bull market has been going for so long and the economic cycle is the fourth-longest ever, albeit the shallowest. That mistrust has led some investors to embrace defensive stocks because they believe the economy isn’t that good and that interest rates will be lower for longer.
“For them, price isn’t their concern,” he said.
However, Arone said, there’s been a change in the sector leadership in the past six weeks.
“As folks become more hopeful the economy is recovering, with some economic data turning better, you’re seeing financials and technology do better from a performance perspective,” he said. “It will be interesting to see if flows follow the performance” into sector exchange-traded funds like the Financial Select Sector SPDR Fund (XLF) and Technology Select Sector SPDR Fund (XLK).
Consumer staples and utilities aren’t the only sectors that seem expensive as investors reach for yield while trying to stay in liquid investments, Arone said.