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Stock Watch

Should traders be opting for defensive over growth stocks?

Should traders worry about stock markets hitting all-time highs? The idea seems counter-intuitive. Booming share prices are surely a good thing for traders, with growth stocks seemingly powering the recent gains. But dig a little deeper and it’s defensive stocks that are propping up the S&P 500.

 

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Defensive stocks propping up the S&P 500

This week saw the S&P 500 hit a fresh all-time high as the index’s historic bull run continues. This high comes amongst a tumultuous earnings season. FAANG growth stocks, which have been grabbing the headlines in the financial press this year, have been posting disappointing quarterly numbers.

Amazon’s [AMZN] underwhelming earnings, sent the stock down 10% in after-hours trading when they were released. And while Amazon's share price might be up 17% this year, it's off the highs seen in early July. 

 

 

Alphabet [GOOG], which runs Google, posted results that missed estimates and were enough to prompt traders to ditch the stock, driving shares down 2% on the day. 

Then there’s crashing SaaS stocks, like Slack [WORK], which have dented confidence in tech's growth potential.

 

Time to buy defensive stocks?

On 4 November, the top four stocks on the S&P 500 were energy companies. Cimarax Energy [XEC] led the field with a huge 6.84% climb. While pharmaceutical giant Pfizer’s [PFE] share price jumped 3.3% last week after posting strong earnings results, a marked contrast to Amazon’s performance.  

 

 

The change in fortune has led to some traders to change strategy. Instead of momentum, traders are now looking for value. As the Wall Street Journal has pointed out, the S&P 500's retail and utility sectors, both defensive plays, are up this year.

Not only that, but these stocks often carry a decent dividend, meaning that irrespective of performance they often payout. The US real estate investment trust Macerich [MAC] carries a huge 10.91% forward yield, which should attract income-seeking investors.

Mike Wilson, Morgan Stanley’s [MS] US chief investment officer cautioned:

“The S&P 500 is back at all-time highs but with even greater defensive leadership it may warrant investor caution with respect to a growth reacceleration.”

“Our goal is to remain independent, so the most likely outcome is an IPO in the next couple of years” - Morgan Stanley US chief investment officer Mike Wilson

 

Is this the end for growth stocks?

So, has the uptrend for growth vs value stocks ended? Andrew Thrasher, writing for Opto, doesn't think so:

"The trend remains above the breakout point and momentum is holding on to its bullish range. Neither of these two points are bearish for growth’s up trend in relative performance."

In Thrasher’s analysis, both momentum and growth can co-exist in the same market.

“The trend remains above the breakout point and momentum is holding on to its bullish range. Neither of these two points are bearish for growth’s up trend in relative performance” - Andrew Thrasher

 

Still, recession indicators like falling earnings and weak economic data are still out there. The Fed's decision to cut interest rates to kick-start the economy also points to problems in the wider markets.  Both factors will give traders pause for thought when investing in growth stocks.

Even traders with short memories will know that hitting an all-time high isn't the be-all and end-all. When the S&P 500 hit an all-time high in July, the index quickly dropped on fears over the US-China trade war. That issue is still out there, as are recession indicators like falling consumer sentiment.

For the time being, traders looking for gains in the current climate may wish to look a little deeper into the defensive market.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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