Stocks rebounded after a tough April, led by two sectors that typically outperform when the economy is in recession.
Since April 16, around the time the S&P 500 (^GSPC) hit its recent low, Utilities (XLU) led the charge, with an increase of almost 12%, accounting for all of the sector’s gains since the start of the year. Basic consumer goods (XLP) stocks are up nearly 5% over the same period, while the S&P 500 is up about 2.7%.
Wall Street strategists said both sectors were likely playing catch-up after a dismal performance in early 2024.
Considering both sectors have been among the worst performers in the S&P 500 over the past year, Truist co-CIO Keith Lerner felt there was an aspect of the move that was simply rotation investors into an area that has yet to participate much in the recent market rally. .
The utilities sector entered March at its largest discount to the S&P 500 from a valuation perspective (using a forward price-to-earnings ratio) since 2009, according to Lerner. Meanwhile, consumer staples have underperformed the S&P 500 by nearly 30% over the past year. This represented a potential buying opportunity in both traditionally “defensive” sectors.
“With markets up as strong as we have since October, people are getting nervous,” Lerner told Yahoo Finance. “They want to move towards something a little more defensive, take profits… It’s also just saying, ‘Hey, what didn’t work and what might have an opportunity to catch up or to resist better if the market is ‘correct?'”
There have been clear fundamental factors as to why utilities would be bid up over the past month. Sector profits are up 26.7% this quarter compared to the same period last year. This is the second highest growth rate of any industry, according to FactSet. And there is growing conversation on how increased interest in projects involving artificial intelligence and electric vehicles could boost electricity demand for companies in the utility sector.
Several macroeconomic catalysts were also in play. The rise in utilities, an interest-rate sensitive sector, comes as investors digested the Fed’s message last week that a further rate hike is unlikely. This sent the 10-year Treasury yield (^TNX) down about 20 basis points from its 2024 high, providing respite to a sector that has generally fallen as yields have risen over the past year.
Another key move occurred in economic data. After economic growth continued to surprise Wall Street at the start of the year, the data changed in April, highlighted by a weaker-than-expected jobs report and contraction in manufacturing activity for the month.
And while that doesn’t mean the U.S. economy is definitely slowing, it has caught investors’ attention. Morgan Stanley Chief Investment Officer Mike Wilson wrote in a weekly note to clients on May 5 that investors “may consider a small exposure to defensive sectors like utilities and consumer staples” if manufacturing data continued to be weak.
But the rise in the utility and consumer staples sectors won’t necessarily continue.
Kevin Gordon, senior investment strategist at Charles Schwab, told Yahoo Finance he’s “not sure” if the defensive play continues, because when you look at what has dominated the market since early March, many different stories are at work. Communication Services »(XLC) rise over the past few months shows a direction toward growth, Gordon said. Energy (XLE) would be rather cyclical. At the same time, the recent increase in community services reflects a defensive attitude.
All three sectors are now the best performers in the S&P 500 this year.
“That doesn’t really send a clear message to me about whether or not the markets are taking the risk,” Gordon said.
Josh Schafer is a reporter for Yahoo Finance. Follow him on @_joshschafer.
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