Safe-haven stocks that initially held up well amid the market sell-offs are now beginning to tumble. Defensive sectors have taken a sharp dive in the past week. The Consumer Staples Select Sector SPDR ETF (XLP), the Health Care Select Sector SPDR ETF (XLV), the Utilities Select Sector SPDR ETF (XLU), and the Real Estate Select Sector SPDR ETF (XLRE), all down more than 3% since the market close on Dec. 13.
Even star health care stocks like United HealthGroup Inc. (UNH) have plunged this month after big gains earlier in the year.
Wells Fargo equity derivatives strategist Pravit Chintawongvanich says that defensive sectors have been the beneficiaries of large asset inflows but that a broad pullback might suggest the sector rotation may be coming to an end, according to a detailed analysis in Barron’s.
These Safe Havens are Crumbling
- Consumer Staples
- Health Care
- Real Estate
What it Means for Investors
In the second broad market sell-off of the year, the S&P 500 has fallen about 15% from its September peak, a crash that has been led by different sectors. In the past week’s sell-off, the S&P 500 has fallen 6.5% from last Thursday’s close to midday today. But this latest rout has been led by the consumer staples and health care sectors, which are down 6.8% and 8.3%, respectively, over the same period. This week saw the utilities and real estate sectors join in, off 3.2% and 3.8%, respectively, since last Thursday.
The utility sector may face additional sharp declines after rallying since October, according to Chintawongvanich. Based on the Utilities Select Sector SPDR ETF’s historical trendline, he thinks the fund should be trading closer to $49 rather than around its current level of $55
As for the other defensive sectors, their sell-offs could be an indication that a market-wide bear market is setting in, defined by the major indexes falling at least 20% off their highs. “If the defensives sell off too, that opens the door to a ... selloff where every sector is down,” wrote Chintawongvanich. If history is any indicator, though, he says the defensive stocks' plunge may be a sign that the broader market correction is near a bottom.