The stock market has clawed back from the depths of this month’s selloff, but a look under the hood shows traders are adding a healthy dose of safe haven to their positions.
After an initial rush into the riskiest parts of the market unlocked by U.S. President Donald Trump’s announcement of a 90-day pause on most tariffs, investors who piled into safer sectors have fared better.
On days the broader market gained, a basket of defensive stocks tracked by Barclays Plc mostly outperformed the stocks of companies whose fortunes are closely tied to the ups and down of the economy. And on days when sentiment soured, a defensive corner of the market still beat cyclical names.
A look at companies with strong and weak finances points to a similar trend. Both groups posted a similar double-digit relief rally on the April 9 pause announcement. Since then, however, a group of stocks with the direst finances has declined 3.3%, underperforming those with stronger balance sheets.
The preference for defensive stocks underscores that the market’s rebound leaves it well short of a risk-on mood that would suggest further gains are likely.
“The traditional safe-haven playbook is what the market is moving toward,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. Being in more defensive sectors “is a way to hide out through the storm until investors feel like there is more clarity.”
Lerner said he started investing more in utilities than he typically does a few weeks ago because he sees the sector being less impacted by tariffs. This was part of a more sweeping defensive re-allocation he undertook, he added.
Companies in sectors like utilities, consumer staples, and health care tend to be the most resilient during economic downturns, offering consistent earnings streams and relatively steady returns. Client flow data from Bank of America Corp. published April 15 also showed investors have been diving into defensive pockets of the market since the rout began, with persistent inflows to materials and health care.
Leaning in
The tilt toward defensive companies reflects a change of market behaviour and risk-reward dynamics, Manish Sinha, an executive director at JPMorgan Securities who specializes in equity factors and macro strategy sales and trading, said in an April 16 note to clients.
The shift is clear when looking at artificial intelligence-focused names that have cratered recently after being drivers of growth for the past two years. Shares of Nvidia Corp. and Advanced Micro Devices Inc. have declined on tariff developments, with sentiment further hurt by a disappointing earnings report from ASML Holding NV.
“Companies in growthier areas of the market are struggling since their fate seems out of their control for the time being,” said Dave Mazza, chief executive officer of Roundhill Investments. “Investors are prepping for more stock market turbulence by shifting to defensive sectors.”
With assistance from Matt Turner.
Alexandra Semenova, Bloomberg News
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