The latest rise in the stock market has been helped along by so-called safety stocks, signaling a shift among investors toward seeking certainty as trade tensions and central-bank policy push and pull markets.
Recently, more companies in S&P 500 sectors perceived as safer—such as utilities, consumer staples and real estate—have been outperforming the broader market. The shift to safer stocks is a reversal from earlier this year, when cyclical sectors tied to the health of the economy propelled major U.S. stock indexes to fresh records.
Trade tensions rattled investors last month, with indexes posting their worst May since 2010. But stocks have rebounded recently, and the Dow Jones Industrial Average (.DJI) and S&P 500 (.SPX) both sit within 2.7% of their records. Signs have emerged that the Federal Reserve might cut interest rates to boost the U.S. economy, and Friday’s weaker-than-expected employment report for May added to growing expectations of a rate cut.
The move into safer stocks “really demonstrates how risk-averse investors have become in recent months,” said Eric Marshall, portfolio manager at Hodges Capital Management. “A lot of it has to do with what effect the tariffs may have on the economy and uncertainty over how the Fed will or will not respond to that.”
As bond yields have fallen, safety stocks with steady dividend payouts have become more attractive. Those types of companies also are considered some of the most reliable and least volatile in the stock market. Shares of beverage giant Coca-Cola Co. (KO), cellular-tower company American Tower Corp. (AMT) and power firm NextEra Energy Inc. (NEE) have each climbed at least 6.1% since the broader market came under pressure May 13 on renewed trade concerns. The S&P 500 has ticked up 0.4% over that time span.
At least 70% of the companies in the utilities, consumer-staples and real-estate sectors are trading above their 50-day moving average, a closely watched trend line that some investors use to track momentum.
The yield on the benchmark 10-year U.S. Treasury note settled at 2.096% Thursday, well below November’s seven-year high of 3.232% as the Fed has scaled back its rate projections amid fears of slowing global growth. Yields fall as bond prices rise, which typically happens when investors flock toward safer assets than stocks.
The 10-year yield is below the 3.2% dividend yield offered by utilities stocks in the S&P 500, which is among the highest in the index and exceeds the broader S&P 500’s 1.9% yield.
The Fed’s dovish tilt this year has also boosted real-estate shares that had been pressured by the threat of higher rates. Real-estate stocks in the S&P 500 have advanced 20% in 2019, outpacing the S&P 500’s 15% rise, after the group slumped 5.6% last year. The sector is the second-best-performing group behind technology, which has climbed 23% in 2019.
Meanwhile, the Consumer Staples Select Sector SPDR Fund (XLP), which holds companies like Procter & Gamble Co. (PG) and Walmart Inc. (WMT), has risen for nine consecutive days and is up 6.2% over that period, hitting a record Thursday. That marks its best nine-day stretch since August 2011, according to Dow Jones Market Data.
Investors also have recently piled into exchange-traded funds that are supposed to offer low turbulence even as U.S. stocks have risen this month. Investors have pushed money into the Invesco S&P 500 Low Volatility ETF (SPLV), which has recorded $1.9 billion in inflows this year, FactSet data show. The iShares Edge MSCI Min Vol U.S.A. ETF (USMV) has also drawn fresh cash.
Some investors are still scooping up stocks in other corners of the market. Michael Sheldon, chief investment officer at RDM Financial Group at HighTower, said his firm is adding exposure to health-care stocks for their growth and defensive nature.
“We’re not chasing high valuations in the defensive part of the market,” Mr. Sheldon said. “While we do own a few of the slower-growth, higher-yielding names within the market, we’re generally wary of paying up for stocks that have made a run recently, like the utilities sector.”
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