Coronavirus fears continue to rack the markets as the Dow Jones Industrial Average took another one on the chin with a second straight losing session, causing investors to dial up the defense with safe haven assets like bonds. This is also causing a flight to safety in defensive equities, which sets up nicely for a relative value ETF trade.
Even if the U.S. has been relatively immune to the effects of the virus versus China, the fear of a global pandemic has investors fretting.
“Complacency has been evident with regard to the stock market’s behavior and the impact of the coronavirus on global growth,” said Schwab Chief Investment Strategist Liz Ann Sonders. “The initial outbreak of the virus conspired to shake that optimism, but after a mild 3.3% pullback in late January, complacency built yet again on hopes of a containment of the virus.”
The World Health Organization said the virus has already afflicted more than 79,000 people around the world, including 2,600 deaths, mostly in mainland China. What has investors jittering now is the global outbreaks in other countries, such as South Korea, Italy Japan, and the 35 confirmed cases in the United States.
“Italy and South Korea—the eighth- and 12th-largest economies in the world, respectively—have shut down public buildings, sporting events, and schools in parts of those countries. In the case of Italy, at least 10 towns around Milan have gone under lockdown,” Sonders said.
Right now, the capital markets are seeing a sustained flight to safety, but in the long run, risk-on could be back. In essence, the hope is that the effects of the coronavirus will be a temporary blip on the radar screen.
“We continue to recommend that investors focus on diversification and rebalancing, and an emphasis on quality growth at reasonable prices, with a bias toward more defensive larger-cap stocks at the expense of more-cyclical smaller cap stocks,” Sonders says.
If investors believe that U.S. defensive sectors will outperform cyclical sectors, the Direxion MSCI Defensives Over Cyclicals ETF (NYSEArca: RWDC) provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors.
RWDC seeks investment results that track the MSCI USA Defensive Sectors – USA Cyclical Sectors 150/50 Return Spread Index. The Index measures the performance of a portfolio that has 150% long exposure to the MSCI USA Defensive Sectors Index (the “Long Component”) and 50% short exposure to the MSCI USA Cyclical Sectors Index (the “Short Component”).
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