Sometimes, safety is better than sexy

The last two weeks have been a wild ride in the global financial markets, with U.S. stocks sliding while Treasuries climbed. From technology to retailers, signs of price pressures are starting to show at U.S. companies, contributing to the worst October start for the S&P 500 since 2008. American equities fell the most, as concerns over the U.S.-China trade war’s impact on economic growth, the Italian debt crisis and rising interest rates. Technology shares led the sell-off, with disappointments from key industrial and tech names, adding to the anxiety. Equities have had their three worst sessions since April in the space of eight days as higher rates and labor costs, trade war woes crimp margins.

What is the outlook for rest of October through end of the year is the question on everyone’s mind?

Future Wealth’s View

In our article on Sep 30 (link is at www.futurewealthllc.com/research), we had cautioned our readers that the third quarter is likely to show the first real effects of the tariff wars and the impact of the U.S. tariff war with China will be a closely watched point for investors. We had further highlighted that volatility in October tends to be higher historically and with the market basing much of its prolonged rally in 2018 and 2019 on surging profits, a falloff could take the market the other way. Prior to the writing of that article on Sep 30, we had begun moving our client portfolios into more defensive names.

Clairvoyance or not, it sure looks like that the market has gone defensive with consumer staples and utilities being the best performing sectors in October. It is our view that more pain awaits those who are long technology and other growth sectors such as energy and biotech. With uncertainty looming around the elections in November coupled with rising Treasury yields, the market is suggesting to us that it is time to take shelter. Yes, one usually won’t find big profit, sales growth and stock appreciation with defensive companies. But, their stocks are unlikely to decline significantly in a sell-off and they pay hefty dividends. Sometimes, safety is better than sexy.