It hasn’t been a good start to the week. All three major indexes-the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite -slumped more than 2% on Monday. Even the “safe sectors” have started to crack.
It started with consumer staples and health care, as the Consumer Staples Select Sector SPDR ETF (XLP) tumbled 1.7% last Friday and another 2.3% on Monday, while the Health Care Select Sector SPDR ETF (XLV) lost 3.4% on Friday and 2% on Monday. By Monday, utilities and real estate joined the downturn, as well. The Utilities Select Sector SPDR ETF (XLU) plunged 3.2% on Monday-the fund’s largest down day since the 2016 elections, while the Real Estate Select Sector SPDR (XLRE) slumped 3.7%. Consumer staples, health care and utilities continued to be some of the worst-performing sectors on Tuesday, while real estate rebounded.
The S&P 500 has come down from the 2,800 level three times over the past two months, and each time was led by different sectors: Materials and Industrials from Sep. 20 to Oct. 29; Technology, Energy and Consumer Discretionary from Nov. 7 to 23; and Financials from Dec. 3 to 14. Defensive sectors might just be the latest victim of the rolling volatilities.
A downturn like this is “highly inconvenient” for investors, according to two research reports from Wells Fargo equity derivatives strategist Pravit Chintawongvanich published Monday and Tuesday. He wrote that there have been large asset inflows to defensive sectors such as health care that have been outperforming the broader market. On a positive note, however, a broader pullback could also indicate that the rotation is coming to an end and the current correction might not be far from bottoming, Chintawongvanich wrote.
Utilities may be due for a drawback, anyway. Despite higher interest rates this year, utility stocks have been in rally mode since October. They now look too expensive versus where they “should” be, according to Chintawongvanich. Judging only from the historical trendline, the Utilities Select Sector SPDR ETF should be trading at around $49, much lower than its current level of $55.
Chintawongvanich suggested that now might be a good time to bet on the sector’s drop: If the market continues to decline, utilities should sell off; even if the market rallies, the sector will likely underperform.
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