- Investors are risking their portfolios amid recession fears, prompting a sell-off in the stock market.
- Weak economic data, including a rise in unemployment, has fueled recession worries.
- Traders are reacting by piling into defensive and dividend-paying stocks as well as government bonds.
The stock market recession book is in full swing as suddenly panicked investors look to aggressively unload their portfolios amid fears of a downturn.
Major equity indexes have been in freefall for three straight days, with a sell-off in response to a flurry of weak economic data. Investors are wondering whether the Federal Reserve waited too long to cut interest rates and whether it is too late to avoid a recession. As indices remain deep in the red, with the Nasdaq-100 in correction territory, calls for an emergency cut are gathering steam.
But that doesn’t mean every area of the market is getting hit. While the S&P 500 has fallen 5% since Thursday, three sectors in the benchmark index remained in the green: real estate, utilities and consumer staples. Seen as safety during market turmoil, they have outperformed amid investor nerves.
The same goes for ultra-secure connections. U.S. Treasury yields fall to annual lows as traders play the defensive and run into government debt.
Detailed below are four areas of the market’s best performance that make it clear that investors are using the recession playbook:
1. Hedging stocks
Investors are planting money in defensive stock sectors, such as consumer staples and utilities, which tend to perform better during difficult changes in the economy.
Since Thursday, the consumer goods and services indexes within the S&P 500 have risen 0.7% and 0.3%, respectively. Grouped with real estate, they are the only areas of the benchmark index to have gained over the past three trading days, with all other areas of the market posting losses of up to 10%, according to Bloomberg data.
“As the pace of U.S. economic growth is poised to slow in the second half of 2024 and into 2025, investors have looked to the stability of defensive stocks to position their portfolios to weather any potential downturn,” David Sekera, chief of the U.S. . market strategist at Morningstar, said in a recent note.
2. Stocks that pay dividends
Stocks that pay dividends to shareholders, another common recession play, are also growing in popularity.
Utility stocks, which often pay dividends, have outperformed the overall S&P 500 in recent trading days, while the iShares Global Utilities ETF is up 12.7% from year-to-date levels.
3. Government bonds
US Treasuries saw a sharp rise on Monday as traders predicted sharp rate cuts – a policy move that is usually indicative of the Fed’s response to recession risks.
Treasury yields, which fall as government bond prices rise, hit their lowest level in a year on Monday. The yield on the 10-year US Treasury was down 10 basis points in morning trading, while the yield on the two-year US Treasury was down 16 basis points.
“Bonds are seeing safe demand,” David Rosenberg, chief economist at Rosenberg Research, said in a note Monday. “For the macro bulls out there, I have some news for you: the bond market is telling you that something not so good is going to happen,” he added later.
4. Selling high momentum growth stocks
Investors, meanwhile, are removing high-growth stocks — specifically, tech stocks — from their portfolios. The Nasdaq deepened its descent into correction territory this week, with the tech-heavy index losing 12% over the past 30 days.
Meanwhile, the S&P 500 information technology index has fallen 9% over the past three days.
“The tech bubble, as was the case in 2000 (and it wasn’t about dot-coms at the time, but the entire sector was being engulfed by the Internet, as has been the case now with the AI craze), is in process of the explosion,” wrote Rosenberg. “As we saw with routers, cables, and fiber optics in the late 1990s, AI investment anxiety is now starting to grow, and the comparisons are bleak.”
However, some forecasters say the outlook for a recession remains uncertain. While the slowdown in the labor market looks worrisome, the weakness in the latest jobs report is likely overstated due to recent weather events, which temporarily displaced about 416,000 workers, Ned Davis Research said in a note.
“Next year’s rate makes sense if the US economy slips into recession and/or inflation falls below the Fed’s 2% target,” analysts said of market expectations for a rate cut. “Even though we can get there, that’s not our call at this point.”