SmartInMoney

 

As U.S. economic growth weakens, the benchmark Standard & Poor’s 500-stock index has been down about 7% since April 29. The Economic Cycle Research Institute’s Weekly Leading Index showed that U.S. economic growth is at a 25-week low as it continues to weaken since peaking in mid-April as of June 17.

 

There’s been a clear shift in sentiment over the past two months, with concern about global growth steering buyers from riskier areas of the market toward traditional defensive. Since the end of April, the four defensive sectors of the stock market, namely Health Care, Consumer Staples, Utilities and Telecommunications, have outperformed the four cyclical sectors – Consumer Discretionary, Industrials, Technology, Materials and Energy – that led the market in 2009 and 2010.

 

When the market was in rally mode, the cyclical sectors outperformed. But when the market was in correction mode, the defensive sectors outperformed. The traditionally defensive sectors are places to put your money when the market's direction is unclear and investor sentiment is more conservative.

 

The risk trade began as a response to government moves around the world to revive economies in the wake of the 2008 financial market meltdown. This easy-money strategy got a needed boost last August after Federal Reserve set the stage for a second round of the Fed's policy, known as ''quantitative easing 2'' (QE2).

 

But now the market is facing uncertainty as it is questioning whether the U.S. economy can stand on its feet once the Fed wraps up QE2 at the end of June, or whether the central bank will have to continue its accommodative stance. The market also concerns that China and other emerging markets, which fueled much of the commodity and materials boom, are now showing fiscal restraint in the face of mounting inflation.

 

 

Since the beginning of April, the market's cyclical leaders have become noticeable laggards. Energy stocks in the Standard & Poor's 500 index are down 5.9 percent as a group, while the materials sector lost 3 percent and the financial sector slid 2.8 percent.

 

Taking their place are stocks in defensive sectors. Health care was up 9.6 percent since the end of the first quarter; consumer staples sector was up 8 percent; and utilities gained 6.6 percent.

 

Consumer staples are classic defensive investments and they’ve performed their role perfectly as investors have become increasingly nervous. Staples are the basics in your shopping cart — packaged foods, beverages, household products — which people buy regardless of economic conditions.

 

The sector is up about 6.5% for the year on the strength of powerful moves in April and May. The S&P Food & Beverage subsector has surged 12.8% so far this year. Buying portfolio insurance with consumer staples stocks seems expensive now. The average consumer-staples sector fund has gained about twice as much as its consumer-discretionary rival.

 

Utilities typically don't post share-price gains of the magnitude that health care and consumer staples do, but the utilities group's 4.2 percent average dividend makes up for that.

 

The rotation to defensive stocks from cyclical ones has directly impacted the industrials sector, which features companies involved with construction, engineering, railroads, air freight and logistics. Next to consumer discretionary, industrials was the best-performing S&P 500 sector in 2010, gaining 24%. This year so far, the industrials stocks in the S&P 500 were up about 4% through June 21.

 

These stocks are considered cyclical as their performance is closely tied to the economy and to investors’ perceptions of economic health.

 

Technology has been the worst-performing sector so far this year other than financials. Tech is facing the headwinds of a slowing economy.

 

Concern about slower global economic growth has grounded the once high-flying S&P 500 materials sector, which has lost about 1% on average so far this year. Materials, together with industrials and energy, are fundamental to the global growth story.

 

Energy stocks are still up strongly for the year although the sector had been lost 4% in the month through June 21. Oil prices have fallen to their lowest level since February.