The market turmoil of the past year has concealed the dramatic outperformance of two stock sectors, suggesting that many investors remain deeply skeptical about the longevity of the bull market - and even the 2019 rebound. The total returns of safe-haven sectors, including utilities and real estate, have been several-fold higher than the S&P 500 Index (SPY) over the past 12 months as investors use bond-like equities to shield themselves against a growing list of market and economic risks.

The strength of these sectors, especially utilities, reveals the impact of investors who “don’t really buy the rally,” Jim Paulsen, chief investment strategist of the Leuthold Group, told Barron’s in a detailed story on the topic. They still want to participate in the stock market but are remaining cautious by investing in its more conservative sectors, says Paulsen.

2 Safety Sectors Crushing the S&P 500

(1-year total return)

  • Utilities Select Sector SPDR ETF; + 20.3% (total return); includes Nextra, Duke and Sempre.
  • Vanguard Real Estate ETF; + 18.3%; includes Prologis, Simon Property and Avalon Bay.

Source: Barron’s; as of 03/14.

What it Means for Investors

Paulsen’s insight helps to explain why bond markets have been attracting investors even as the stock market rallies. Generally, rising equities reflect bullish sentiment about the economy while rising bond prices (and falling yields) suggest a rush to safety. Simultaneous gains in equity and bond prices send a mixed signal.

One reason stocks may continue to do well even as investors remain cautious is that as bonds become more attractive, the higher demand pushes down their yields. Lower yields then make them less attractive. Safe-haven equities, however, offer investors a middle ground—a bit more safety than the average stock but with a little more yield than what bonds are offering.

Looking Ahead

Safe-haven stocks are likely to post solid gains near term as investors face a number of uncertainties, including trade negotiations between the U.S. and China and the finalization of a Brexit deal. But these safe havens stocks' gains already have slowed during the sharp 2019 rally. And any brightening of the overall economic outlook could see investors ditching the safe-havens for riskier bets.