The stock market has responded well since its recent low on April 18th. The S&P 500 has rallied for eight of its last 10 days. What’s interesting is that up until the 18th, many of the defensive sectors had been leading the market. By defensive, I mean sectors like healthcare, consumer staples and utilities. That’s rather usual, but not unheard of. Typically, cyclical stocks lead the rallies, and defensive stocks take charge when the market sours (meaning, they fall the least).
So what’s going on?
My take is that the recent rout of commodities, gold in particular, helped give the lead to defensive sectors. Energy and Material stocks have been laggards this year. I don’t think we can say yet whether this is a precursor of a broad decline in the economy, but it’s true that some of the recent economic data has been weak.
The jobs report for March was lackluster, and last Friday’s GDP was decent but far from strong. But those reports covered periods earlier this year. We’re now well into Q2 and since April 18th, the market has been rallying on strength from cyclical stocks. Technology has been particularly strong.
The Federal Reserve’s policy statement this week specifically said that “fiscal policy is restraining economic growth.” The Fed also said that it may increase or reduce its bond buying to help the economy.
I take this to mean that rates will remain very low. As a result, the math continues to be very favorable for stocks. Stocks may be less cheap but they’re still a lot cheaper than bonds.
Just look at Apple (NASDAQ:AAPL). The company made news this week with its massive bond offering. Apple was able to issue five-year bonds with a negative real interest rate. Apple’s dividend yield is higher than their cost to borrow, so it wouldn’t make sense not to borrow.
What to do now: Investors should concentrate on high-quality stocks and particularly those that pay generous dividends.