Is It Time for Investors to Turn Defensive?

Last week was particularly turbulent for US equity markets with the Dow Futures (CME GROUP: YM) down 890 points by Wednesday with the release of a weak purchasing managers survey (ISM PMI) for September showing the second month of contraction. A figure above 50 on this diffusion index indicates growth, while a value below 50 indicates contraction.

The Dow recovered some territory by Friday and ended the week down just 1.6%. The poor ISM PMI number sent shockwaves through the market on concerns that US economic activity is slowing down and the US Federal Reserve Bank (the Fed) may not be reducing interest rates fast enough to help. (For more see: Is the US Economy Really on the Verge of Recession?)

Non-Farm Payrolls Offer Little Support

Non-Farm payrolls data released on Friday last week did little to calm nerves. The actual number of new jobs created in September was 136,000 and was below analysts’ expectations of 145,000. The lower than anticipated figure marked a notable slowdown from the job growth of the previous three months.

Economists were equally concerned about the slow pace of private payrolls, which grew by 114,000 in September compared to expectations of 130,000 new jobs in the private sector. Average hourly earnings in the month also disappointed, increasing 2.9% against economist estimates of 3.2% growth. A confident US consumer is a crucial component to keep the US economy humming. If jobs and wages are slowing, the economy may not be far behind.

What Should Investors Do Now?

It is difficult for investors to know what to do. Timing the market is usually a bad strategy, but it also depends on your timeframe. Investors with an extended timeframe may be best off waiting out this cycle. Markets tend to rise in the long-run and getting out too early can lead to missed opportunities. Investors with a shorter timeframe, who are closer to retirement or need funds to put a child through college, may want to consider taking some money off the table.

Still, other investors may want to employ a sector rotation strategy. Such an approach means moving into defensive sectors that are immune to the economic cycle and recession in the later stages of an economic expansion. Popular late-stage industries include things like Consumer Staples, Utilities, Real Estate and Financials. Some of these sectors have already produced excellent returns in 2019. For example, the Consumer Staples Select Sector SPDR ETF (AMEX: XLP) is up more than 23%, and the Utilities Select Sector SPDR ETF (AMEX: XLU) is up more than 25% in 2019.

The strong performance in these ETFs may signal investors are already expecting an economic downturn and have started moving money into these sectors. If a recession does come soon, then these ETFs may continue to outperform into 2020.

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Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.