Which sector has outperformed the technology-driven Nasdaq 100 since the Dot-Com Bubble in 2000?
Check your work at the bottom of this article, the answer will surprise you.
You've undoubtedly heard the excitement about the Fed engineering a "soft landing". It's a feel-good story that has most investors lured into the idea that we're going to avoid any type of economic slowdown, let alone a recession.
Well, that's what Wall Street has been telling us, but their actions say something different..
Earlier this week JPMorgan’s Global Research group released their latest outlook for the economy.
The Headline read “The probability of a recession now stands at 35%”. That’s the figure for the end of 2024.
Looking out to 2025, those odds go up to 45%.
I know, you’ve been told that the Fed is going to stick this “soft landing” which makes us feel like we’re just going to pick up with the booming economy that we had before crippling inflation slowed things down.
That’s not going to happen. Recessions are a naturally occurring event. We can’t avoid them forever.
Odds are growing that the economy will indeed fall into a recession. When you add the fact that many stocks are trading at all-time highs and incredibly high valuations, it means the risks for stocks are incredibly high.
Wall Street’s already running their playbook to prepare for that outcome, how about you?
Trading platform ETORO reported in June that the three largest sectors the average retail investor holds are financial service, technology and energy stocks.
That’s almost completely opposite of What Wall Street has been buying over the last six months.
As a matter of fact, those are three of the sectors that get hit the hardest during a recession.
Investors think the market is rigged in favor of Wall Street? Sometimes it’s just because they don’t pay attention to the moves that Wall Street is making.
Wall Street has been running a different playbook in preparation for a recession.
Lower volatility, maintain consistency.
That’s the rule that gets you through a recession and the bear markets that often go with them. That’s the rule that the large institutions and money managers follow. At the same time, they often tell you and I that we should be holding those tech stocks and other overvalued names.
That’s also the foundation for the money migration that we’ve seen over the last six months.
Following that rule means that you must get away from the high-flying technology names and move into more “plain paper bag” sectors.
Move from the fast-running sectors and get into the slower more consistent.
Utilities, Consumer Staples and Real Estate. That’s where the big money has been moving, and those are the three sectors that will serve as the “safe harbor” for the next recession driven market.
The table below shows the performance for the major S&P sectors.
Year-to-date, gold, utilities homebuilders and consumer staples are the best performing groups.
All but the homebuilders are “safety sectors” that have seen increases in their trading volume as the year progresses.
Absent at the top of the list, the Nasdaq 100 and other technology heavy sectors.
The high “beta” nature of these stocks. If you’re not aware of Beta, it’s the volatility or risk of a security compared to the market. The higher the beta the higher the risk in comparison to the market.
Interestingly, trading volume in the market in general has been lightening-up through 2024, including volume in the sectors mentioned above.
But the volume of these three sectors has been on the rise relative to total volume.
That adds up to the institutions taking more defensive postures as we head into the year end.
Let me show you a quick chart that will drive the point home.
Volume on the most popular stock in the market, NVIDIA (NVDA), has been dropping consistently through the second half of the year.
At the same time, volume on Duke Energy (DUK), a utility company, has been on a relative rise. Also note the price difference between the two as Duke has seen a surge in buying over the last three months.
This is just a small example of the low volatility playbook in action.
The Fed will rule the tape for the next week.
Today’s interest rate announcement is going to kick-off a sprint of volatility trading that is likely to take your eyes off the market’s horizon.
Don’t do it… keep your eye on the horizon here, that’s you’re true directional play.
The overwhelming positive momentum is here to stay for the utilities, staples and consumer staples stocks. Yes, gold is also going to maintain its leadership as central banks around the world continue to hoard the commodity as much as individual investors.
Keep it simple!
Start with the ETFs here.
The table below displays the five sector ETFs that I consider the “foundation” for almost any average investor that is managing their investments themselves.
The “core holdings” take advantage of the “lower volatility, maintain consistency” rule that I mentioned above.
Using ETFs allows you to take exposure to these groups of stocks while avoiding “headline risks”. That’s the risk that one company can blow a portfolio’s performance with bad news.
Yes, Gold is part of this portfolio for now.
The Fed’s interest rate policy shift will whittle away at the value of the dollar pushing demand for a “hedge” towards gold.
Don’t fool yourself though, the rally in gold is not a “hedge”, this is a real “trade” as investors, institutions and central banks are all bidding gold prices higher.
From my experience, a “trade” in gold like this happens once a decade or more, the last being in 2005 through 2011 when lower interest rates were followed by a recession (sounds familiar).
That’s right. If you bought the utility, consumer staples and real estate ETFs in May 2000 and held them through today you would have beaten the performance of the Nasdaq 100 and S&P 500.
The table below breaks down the performance of each of the five ETFs since the May 2000 close. IYR performance is based off the first available purchase of the ETF, which was later than May 2000.
The numbers fortify the “lower volatility, maintain consistency” rule and its long-term success at navigating the markets over the long run.
