Broker Check

Defensive Industries Outperform in Turbulent October

November 12, 2018

Technology stocks led the way for the first seven months of 2018. The relative strength of technology stocks for the first part of the year shows a strong upward trend indicating that technology outperformed the broad market by a large margin. Technology stocks posted a return of 19.9% for the first nine months of the year, nearly double that of the broad market.

However, the technology out-performance reversed in October. As the broad market declined, technology stocks declined by a greater amount with several key components of the technology index posting substantial losses for the month. The technology stock index declined 8.48% in the month of October alone.

At the same time more defensive industries outperformed the broad market in October. Specifically, utility stocks increased 1.26% during the month of October whereas the broad market declined 7.81% in the same period, a more than 9% out-performance for the month. In fact, there were several trading days during October where the broad market was  down and yet  the utility industry  was the one positive green number amid a sea of red negative numbers.

While one month does not make a trend the strong performance by utility stocks may be telling us a few things about the October market selloff. First, a fair portion of the selling may have been driven by fund managers who must remain invested. Therefore, when they are fearful about a continued market decline they buy defensive stocks, such as utilities, rather than go to cash as an individual investor may do under similar circumstances.

Second, the October selloff may have been triggered by inflation fears. Utilities are typically regulated so they can only raise prices to keep up with inflation. This can make them poor growth stocks but it may make them a good inflation hedge as many have monopoly power in the markets they serve, deliver essential services, and can raise prices as inflation increases.

Third, the market may still favor dividends. Even though interest rates increased in October, which can be a negative for dividend paying stocks, investors flocked to utilities which typically pay above average dividends.