A choppy February for investors was punctuated by a poor reading on consumer confidence, a soft report on consumer spending, and a sell-off across many of the momentum trades that had defined the market action this year.
“The fear here among a lot of investors now [has] become that the economy could be slowing down faster than the Fed is willing to react, which is a tough situation,” Steve Sosnick, chief strategist at Interactive Brokers, told Yahoo Finance an interview on Friday.
For the month, the tech-heavy Nasdaq Composite (^IXIC) fell about 4% while the S&P 500 (^GSPC) and Dow Jones Industrial Average (^DJI) were down 1.4%.
At close: February 28 at 5:15:59 PM EST
^IXIC ^DJI ^GSPC
Sosnick noted that in recent days, the Dow has been the best relative performer among the major US stock indexes given its lower weighting towards the tech and momentum names that play a larger role in its peer indexes the S&P 500 and Nasdaq.
Consequently, defensive plays like Consumer Staples (XLP) have a more prominent influence on the Dow than the S&P 500.
“This is an environment either to lighten up [on stocks], raise a little cash, which, considering the cash is still paying you 4%, is not a terrible place to be,” Sosnick said. “But if you want to stay invested, you may want to move a bit more toward low beta stocks and high dividend stocks because they’re a little more insulated from the market’s risk off mentality right now.”
Low beta stocks tend to trade with less volatility than the average stock in the market, either going up or down less when the market moves one way or another.
Whether this market is being shaken by fears over economic growth — or is just seeing a rotation as investors move away from recent winners — is a debate that looks set to define the final month of the first quarter.
“The stock market is in the midst of another growth scare, in our opinion,” Ed Yardeni and Eric Wallerstein at Yardeni Research wrote in a recent note. “The latest batch of economic indicators has been weak. The current growth scare is reminiscent of last summer’s scare.”
That sell-off saw the S&P 500 fall just less than 10% peak-to-trough before the index recovered to make new all-time highs by November.
Neil Dutta, head of economics at Renaissance Macro, warned in a recent note to clients that the economy does appear to be softening, with the Federal Reserve’s decision to keep rates elevated amounting to a “passive tightening of monetary policy [that] is the dominant risk and that has important implications for financial market investors.”
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