The Best Defense: Investors Flee Tech Stocks for Utilities
Steady, plodding, un-sexy stocks like utilities, household goods makers and real estate investment trusts have done far better than the rest of the market during the recent stumble. And
The S&P 500 index, the main measuring stick for the U.S. market, has dropped 9.2 percent since as of Wednesday. The Nasdaq composite, which has a high concentration of tech companies, has slumped 11.4 percent.
Stocks started skidding when a combination of strong economic data and comments from the Federal Reserve led to a big jump in interest rates. Investors began to worry that interest rates would go higher than they expected, and that those increased rates would slow down economic growth. That’s been particularly damaging to high-flying stocks like Amazon
“Those sectors are particularly vulnerable because they’re (valued) based on cash flows longer into the future,” says Kate Warne, an investment strategist for Edward Jones.
Meanwhile investors are worried that growth in company profits will slow down, and the
No stock rises forever, and with that much to worry about, maybe it’s not a surprise that companies that depend on economic growth would suffer some bumps and bruises. But it’s been quite a turnaround: companies like Amazon,
Considered boring, or “defensive,” investors favor those stocks when markets get rough. The amount of cash they pay out in dividends makes them relatively stable, but with the
Those groups of stocks don’t depend much on economic growth: whether the economy is booming or slowing, people will likely spend about the same amount on breakfast cereal, toilet paper, or water, but in a period of slower growth or a recession, workers who are taking home less pay might not buy a home or might spend less on video games or travel.
Warne says the market’s recent weakness won’t last because the economy is still doing well. But she said the days of defensive stocks lagging far behind the rest of the market are probably over.
“The gap we’ve seen over the last few years is likely to narrow a lot,” she said. “The real questions behind the scenes is, are we in an entirely different environment? And I think the answer is no.”