So-called defensive stocks have been leading the market lately, and that's a sign of big trouble ahead for the economy and the market alike, according to Jim Paulsen, chief investment strategist of The Leuthold Group. "For a stock market supposedly driven by some of the best economic performance of the entire recovery, its leadership seems out of whack," Paulsen said, as quoted by Business Insider. The table below compares the recent performance of several defensively-oriented ETFs to the S&P 500 Index (SPX). (For more, see also: 7 Defensive Stocks That Are Crushing The Market.)

Out of Whack: Defensive Stocks Are Thriving

ETF or Index Gain From 6/1 Through 10/2
iShares U.S. Telecommunications ETF ( IYZ) 10.4%
Consumer Staples Select Sector SPDR ETF ( XLP) 10.8%
Vanguard Health Care ETF ( VHT) 14.3%
Vanguard Utilities ETF ( VPU) 7.4%
S&P 500 Index 6.9%

Source: Yahoo Finance, based on adjusted close data, starting with the close on June 1.

Why Investors Should Worry

Looking at data from 1948 to 2018, Paulsen finds that defensive stocks began to show strong relative performance prior to every recession in the U.S. during that time period. First, he plotted the ratio of the total returns (dividends included) of utilities and consumer staples stocks to the total returns of the full S&P 500. Then, on the same chart, he plotted the U.S. unemployment rate, using that as a proxy for economic conditions. That is, he took periods of high unemployment to be indicative of recessionary conditions.

"For a stock market supposedly driven by some of the best economic performance of the entire recovery, its leadership seems out of whack. It might be worth paying attention to this oddity." — Jim Paulsen, The Leuthold Group

Source: Business Insider

The U.S. unemployment rate was 3.9% in August, up slightly from 3.8% in June, but otherwise lower than any time since Dec. 2000, per the U.S. Bureau of Labor Statistics. Paulsen theorizes that defensive stocks may show strong relative performance in periods of low unemployment because they are anticipating that the economy is peaking. He also notes that defensives also tend to outperform when unemployment is at its highest, during the depths of a recession, when the gap in growth between defensives and riskier stocks is narrow.

What's Ahead for Investors

Despite his dire observation, Paulsen does not believe that investors should panic right now, since clear signs of an economic downturn are not yet registering. However, he adds, "Perhaps it is time for investors to consider tilting the portfolio in a more defensive direction."

Four charts presented in another Business Insider story point to trouble ahead. These include: a double top in 2018 for the S&P 500 that looks much like charts for 2000 and 2007, before the start of bear markets in those years; global debt at all-time highs both in absolute terms and relative to GDP; annual scheduled repayments of U.S. corporate debt that will more than double by 2020; and the prospect of an inverted yield curve. Meanwhile, Morgan Stanley finds that returns across a wide variety of assets in 2018 are the worst since the financial crisis year of 2008, indicating more trouble ahead. (For more, see also: Investors Face Worst Returns In 10 Years.)

By contrast, veteran investment strategist Richard Bernstein assesses that signs of a bear market are "nowhere to be seen." He also sees continued strength in the economy. (For more, see also: Why a Bear Market Won't Happen Soon: Richard Bernstein Advisors.)