As investors seek refuge in defensive-minded stock names, one market technician sees the Dow’s widening margin of outperformance over the S&P 500 and Nasdaq as a sign that stocks’ latest rally could fizzle out as quickly as the previous one.
In a Monday note to clients, Jonathan Krinsky, chief market technician at BTIG, said the Dow Jones Industrial Average DJIA,
it almost never outperforms in the early stages of a sustained capital rally—and when it does, these rallies tend to fizzle out.
see: Dow on track for record October as big tech tanks: What’s next for stocks as investors await Fed cues
“I don’t think we’re in a sustained comeback,” Krinsky said during a phone interview with MarketWatch.
“People are trying to catch upside, but in a more defensive way.”
First, Krinsky said periods of Dow outperformance during the early stages of equity recovery are incredibly rare in the past four decades of financial market history. He cited four “new bull” markets — 1982, 2002, 2009 and 2020 — as examples.
He highlighted the year 2002 as a particularly noteworthy example. As then, US stocks were caught in a cycle where the Dow’s margin of superiority continued to widen.
BTIG
Krinsky compared this to a similar pattern that emerged before U.S. stocks finally bottomed out after the dotcoms in late 2002.
BTIG
As defensive stocks have outperformed previously hot sectors like information technology or consumer discretionary, professional investors are increasingly pitching them to clients.
The other day, UBS Group Chief Investment Officer Mark Hafaele reiterated his advice to clients to favor defensive sectors such as health care stocks and consumer staples while avoiding growth stocks such as technology.
“We remain the least preferred.” [information technology] and growth,” he said in a note.
This year, the Dow’s outperforming trend began during the first quarter, when weak tech big earnings sent shares of Netflix Inc. nflx,
Meta Platforms Inc. TARGET,
and their peers waver.
But recently it has intensified. The Dow also outperformed the Nasdaq Composite COMP,
and the S&P 500 SPX,
over five of the past eight weeks, according to Dow Jones Market Data. And during the eight-week period ending Nov. 4, Dow outperformed both rival benchmarks for six of the past eight weeks.
A similar pattern emerged during the period leading up to mid-June, when stocks eventually fell to their lowest levels in more than a year.
By the time the October stock market ended, the Dow was up just 14%, marking its strongest October performance on record. Moreover, it outperformed the Nasdaq Composite by 3.7 percentage points, its largest margin since 2002, and the S&P 500 by nearly six percentage points, its largest margin since April 1999, according to DJMD.
One of the reasons why Dov is doing so well right now is that it is largely made up of defensive stocks. As Krinsky pointed out, UnitedHealth Group Inc. UNH,
Goldman Sachs Group GS,
Home Depot Inc. HD,
Amgen Inc. AMGN,
and McDonald’s Corp. MCD,
they are responsible for more than one-third of the Dow’s value.
Consumer staples, utilities, health care stocks, big telecom stocks like Verizon and AT&T (although they haven’t been doing so well lately) and certain types of real estate investment trusts are usually considered defensive stocks, market strategists say.
So far this year, defensive stocks have performed well, along with energy stocks, which have fared the best in 2022. The S&P 500 energy sector is up more than 70% year-to-date, and Chevron Corp . CVX,
is the best result on the Dow, an increase of 60.5%.
Although all three major benchmarks finished lower on Monday, the Dow once again outperformed, falling 0.6%, compared with the S&P 500’s 0.9% retreat and the Nasdaq’s 1.1% year-to-date decline. down just 7.1%, compared to 17% for the S&P 500 and 28.4% for the Nasdaq.
