Stocks Dodge Bear Bullet, Defensive Sectors Surge

With the recent jitters in the U.S. stock markets, it was no surprise that the day began with a gap down and what appeared to be a determined effort to drop lower. But about 30 minutes into the session, the S&P 500, led by strong performance in the consumer staples sector, retraced its steps to get back to break even compared to the day before. This sector, tracked by the sector-index ETF, the Consumer Staples Select Sector SPDR Fund (XLP), closed the day a respectable 1.17% higher, while the rest of the market held ground.

It is notable that the consumer discretionary sector, as well as utilities stocks, performed well in today’s whipsaw trading. With these sectors leading the way, investors hoping that the market finds its footing are likely to be disappointed. During a day when the dollar remained tightly range bound (taking a pause from the U.S.-China trade war), stocks provided a tell for investor sentiment. What they told was the story of nervous investors. 

Defensive stocks in consumer staples brands such as The Coca-Cola Company (KO) and McDonald’s Corporation (MCD) don’t typically lead the markets unless investors are looking for safe-haven kinds of investments. These stocks are considered slower movers but more reliable than the tech sector darlings. When investors favor these stocks over all others, it signals nervousness, and often more falling prices to come.

After The Walt Disney Company’s (DIS) mixed earnings report, it seemed to end its conference call with the share price up substantially in after-hours trading, but by the time the session closed today, the share price was off over 5%. The markets appear to be entering an environment where companies will be punished for bad news or even lackluster results.

In such environments, investors favor consumer staples stocks. Looking back over the year, this is not a recent trend. Considering the relative performance of McDonald’s and Coca-Cola shares, it appears many investors have been seeking safer ground for a while.

When markets show clear signs of nervousness and increased volatility, investors tend to look for alternative investments to hedge their returns. Commodities are typically inflation sensitive, so a currency war between countries might be expected to affect commodity prices across the board. That’s not how things are currently playing out.

The price of gold, as tracked by the SPDR Gold Shares (GLD) that attempts to follow it, has been on the rise all summer and before. In comparison, the price of oil has tumbled significantly over the same period. These diverging moves imply that there may be more afoot in the markets than the simple explanation provided by the U.S.-China trade war headlines.

Three years ago this summer, a useful research paper was published in the journal International Review of Financial Analysis. The authors concluded that bitcoin was not an effective hedging instrument, certainly not in comparison to gold. But a lot has changed in the cryptocurrency world in three years.

Consider this chart that compares the performance of gold, bitcoin, and the S&P 500. It’s pretty clear that bitcoin is much more volatile than the other two asset classes. However, the chart clearly shows that the timing of the market’s nervousness is marked by a clear uptrend in bitcoin’s price and that the recent drop-off in stock prices was inversely correlated with bitcoin’s recent jump. While gold is certainly the investor’s hedge of choice right now, it may not be long before investors will want to consider the merits of hedging with bitcoin.

Although the market average managed to hang on to its meager rebounds from the day before, the nervousness is clearly visible in the price moves of the consumer staples stocks and the price of hedging investments like gold, and for the more adventurous investor, bitcoin as well. There may be more volatility to come if this nervousness continues.

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