Market Moves

Investors seem to be moving around as if they were in the recent John Krasinski thriller, "A Quiet Place," tiptoeing so as not to awake market monsters. While stock market indexes closed slightly lower, gold and bond prices closed on new highs. Further to the point, investor money within market sectors is moving decidedly away from investments considered more risky and moving toward assets considered to be more safe. 

For example, in addition to exchange-traded funds (ETFs) tracking the price of gold (GLD) or the price of bonds (TLT), consumer staples stocks (XLP) and utilities stocks (XLU) are seeing more frequent upticks. Technology stocks, small-cap stocks, financial stocks, and especially micro-cap stocks are repeatedly showing days where they come under pressure.

Consider the two charts below. The Nasdaq 100 (tracked by the ETF with ticker symbol QQQ) is a collection of mostly large-cap stocks that rely heavily on technology to do things better. Although these are traditionally considered growth stocks, in today's market, these stocks are considered more safe compared to stocks of smaller companies.

One ETF that tracks the smallest of the small-companies, the so-called micro-cap stocks, uses ticker symbol IWC. Comparing IWC and QQQ in the following two charts, it becomes apparent that investors really don't want to be in high-potential risk stocks right now – no matter what the upside potential might be. They are fleeing these stocks in quite dramatic fashion compared to the way they seem to be hanging on in the Nasdaq 100 stocks. This behavior is common at times when the market is about to perform poorly compared to historical expectations.

Charts showing investors fleeing risk

Consumer Staples Sector Shows Relative Strength

When investors are nervous, two sectors consistently rise to the top in comparison to all others: utilities and consumer staples. The consumer staples sector featured several stocks closing higher today, including The Procter & Gamble Company (PG), Walmart Inc. (WMT), Kimberly Clark Corporation (KMB), and The Coca-Cola Company (KO). This sector features companies that make things investors consider to be in perpetual demand. Toothpaste, diapers, soap, and soft drinks aren't going to stop being consumed even if the economy tanks. Therefore, the companies that make them might be good investments in hard times.

When individual investors notice that such companies are performing better than the rest of the market, they should be aware of the reasons why. If it appears, as it does now, that investors like these companies because they are nervous about stocks with better growth prospects, this is actually a signal that investors should tread carefully in their portfolios.

Chart showing strength of consumer staples sector

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Get Ready for a Volatile Fourth Quarter

Credit Card Companies Positioned for Retail Season

The fourth quarter of the year is the consumer spending season. Retail companies do their best business of the year, and investors typically make an attempt to exploit that fact. Retail companies are able to do their business so effectively, in large part, because of credit card servicing companies. So if the retail sector is about to fare better than other stocks, it should seem that credit card companies should be right behind them. However, like most concepts in the market, this idea is not so simple.

Over the past three months, company shares from stocks in the financial sector, represented by the Financial Select Sector SPDR Fund (XLF), have taken a decided turn for the worse. Two companies, Mastercard Incorporated (MA) and Visa Inc. (V) have shares with resilient price action. However, industry staple Wells Fargo & Company (WFC) and notable credit processing companies such as Capital One Financial Corporation (COF), Discover Financial Services (DFS) and Navient Corporation (NAVI) have reverted to the sector average, showing the typical pessimism given to other troubled stocks. The good news is that this makes these companies potential value buys. The bad news is that an investor might have to endure prices going down for a while before the prices rebound.

Chart showing the performance of credit card company stocks

The Bottom Line

U.S. stocks closed only slightly lower today but showed several signs of increasing nervousness among investors. This may be evidence to suggest continued falling prices among market averages. Consumer staples and utility stocks are holding their ground and showing relative strength. Despite anticipated strength for retail stocks in the upcoming quarter, credit card companies are showing a mixed profile of performance. 

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