One beneficiary of the 2013 US stock market rally: defensive sectors.
Until recently, classic defensive sectors like utilities, healthcare and consumer staples outperformed as investors were just starting to dip their toes back into stocks focused on those parts of the market many considered safer and less volatile.
But, as I wrote in my latest weekly commentary, over the past few weeks there has been some evidence that this is starting to change.
Utilities are down sharply in May, while healthcare and consumer staples companies are also shifting toward weaker performance. At the same time, we’ve seen better performance from energy, industrial, materials and technology firms, all of which are more cyclical in nature. [Sector Rotation: Defensive ETFs Lead Outflows]
In other words, the real Great Rotation may just be a shift to cyclical from defensive sectors rather than a move to stocks from bonds.
The shift isn’t just a reflection of investors finally perhaps becoming more comfortable with risk. Despite the fact that profitability is actually somewhat lower for many companies in the defensive space, defensive valuations are at historically high levels. The three classic defensive sectors – healthcare, staples and utilities – are trading at an average premium of more than 10% to the market. By way of comparison, back in the fall of 2009, these three sectors were trading at an average discount of around 40% to the broader market.