Fear of recession and stock market — Is it too late to play defensive?

Fears of a recession are mounting as the Federal Reserve prepares to fight inflation. Many stock market investors are already playing defensive, and may be wondering if there is more room for those strategies to work.

But first, how big a concern is the recession? Google searches for this word are constantly increasing, according to the trend data of search companies in the table below:


Fear is understandable. Despite the strong job market, inflation, which has been on a four-decade high, has, on a sentimental scale, reduced consumer dumps.

Fed is playing catapult

It is too late for the Federal Reserve to tighten monetary policy at an astounding pace – including a number of high interest rates and the possibility of a large half-percentage point increase. It also intends to reduce its balance sheet much faster than in 2017-2019.

Federal Reserve officials, of course, say they believe they can tighten policy and reduce inflation without crippling the economy, which economists refer to as a “soft landing”. There are key skeptics, including former Treasury Secretary Larry Summers, who proved that their forecast of rising inflation is a forecast.

important words: The recession is now the ‘mostly’ effect of the US economy, not a smooth landing, says Larry Summers

Eyes on the ramp

Then there is the yield curve.

Yield of TMUBMUSD02Y 2 year treasury note,
TMUBMUSD10Y traded above yields in the 10 year Treasury Note,
Earlier this month. Turning that measurement of the curve into a more sustainable inversion is considered a reliable recession indicator, although other measures that have yet to be proven to be reliable have not yet reversed.

Step: Leading yield-curve researcher says US recession index still ‘does not light red’

Analysts have stressed that the yield curve, even if the flash code is red, is not a time indicator for stocks, and that the period between recession and market peak could be a year or more running. . However, its behavior attracts attention.

Meanwhile, stocks stumbled last week, which fell to four days on Good Friday, the 10-year treasury revenue peak after December 2018, Russia’s brutal invasion of Ukraine continued, and the big banks got the earnings season. Mixed start.

Need to know: As the Ukraine war enters a new phase, default risk, material shock and other things investors need to keep in mind

The Dow Jones Industrial Average DJIA was down 0.8%, the S&P 500 SPX was down 2.1% and the Nasdaq Composite COMP was down 2.6%, with heavier weights for Rat-sensitive tech and other growth stocks.

Getting defensive

While only time will tell whether a recession will begin, the stock market sectors that perform best when economic uncertainty increases have already significantly outperformed the broader market.

Nicholas Colas, co-founder of DataTrek Research, said in an April 14 note that “in times of macro uncertainty, some companies / industries perform better because they have less risky business than the average S&P company.” US large-cap applications, consumer staples and healthcare – often described as the primary defense sector – all perform better than the S&P 500 SPX.
In this year and in the last 12 months.

The S&P 500 was down 7.8% as of Thursday, while the utility sector was down 6.3%, Staples was down 2.5% and health care was down 1.7%.

Colas went deeper into this part of the market cycle to examine whether those sectors were performing better than normal. He looked at 21-year annual comparison data for each segment, measuring how each group had performed against the S&P 500 in the previous 253 trading days.


  • Applications from 2002 saw an average annual comparative performance against the S&P 500, currently minus 2.8%. Performance of 9.9 percentage points from Wednesday to Wednesday over the past 12 months has been a steady deviation from the long-term average.

  • Staples has seen an average annual performance of minus 2.2% against the S&P 500 over the past 21 years. Performance of 7.6 percentage points over the past 12 months has been less than a steady deviation from the long-term average.

  • Healthcare averaged 0.7% annual performance against the S&P 500 over the long term, while performance over the past 12 months (10.7%) was more than a steady deviation from the long-term average.

Room to run?

Such strong numbers would give the impression that those sectors could perform better in an understandable way, Colas said. But, in reality, their performance in the macro uncertain past was even stronger, with all three surpassing the S&P 500 by 15 to 20 percentage points.

“If you are not very positive about the US / global economy and corporate earnings, we recommend that these defensive groups be considered overweight,” he wrote. “Yes, they all worked, but if the US / global macro background was unstable they would not have been extended much further.”

Upcoming places

The Big Wall Street banks gave a mixed result to start the earnings season, which will move in full swing next week. Electric car maker Tesla Inc. DSLA’s results include highlights.
On Wednesday, investors, CEO Elon Musk Twitter Inc. They are worried that he will face distractions as he continues his quest for TWTR.

The Economic Calendar contains a collection of household data at the beginning of the week, while the Federal Reserve’s Beige Book summary of economic conditions is on Wednesday afternoon.

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