Market Rotation: Defensive Stocks Gain Traction as Risk Appetite Shrinks

Focusing on weekly performance, several major U.S. stock market indices experienced declines over the past week. The S&P 500 Index (SPX.I) dropped by 4.16%, while the NASDAQ Composite (NASD.I) saw a more significant decline of 4.87%. The Dow Jones Industrial Average (DJI.I) also faced a setback, falling by 3.85%, and the Russell 2000 (RLS.I) was particularly impacted, with a 2.66% drop. The S&P 100 Index (OEX.I) decreased by 4.31%, while the New York Composite Index (NYSE.I) experienced a smaller dip of 3.56%. Overall, the weekly performance reveals a challenging period for most indices, with notable declines in broader markets like the S&P 500 and NASDAQ. In addition to this, the stock market has exhibited signs of a defensive posture emerging, as investors shift away from riskier sectors in favor of more stable, recession-resistant ones. Energy, particularly energy infrastructure, continues to perform well, up by 2.16%. This is driven by positive sentiment toward energy infrastructure stocks, which may be considered more stable due to long-term contracts and steady cash flows. Utilities (-0.36%) and Tobacco (-2.30%) also demonstrated resilience, with small losses suggesting that investors are gravitating toward defensive stocks offering consistent dividends and stability. On the other hand, cyclical sectors have been hit harder. Consumer Discretionary (-4.28%), Leisure (-6.45%), and Automotive (-3.97%) all saw significant declines, reflecting reduced confidence in sectors tied to consumer spending. Additionally, technology-focused industries like Information Technology (-5.43%) and its sub-sectors, such as Computer Software (-8.48%), experienced sharp losses, reflecting a broader aversion to high-growth, volatile stocks. The market's rotation toward defensive sectors such as Utilities, Tobacco, and Energy (specifically energy infrastructure) may highlights a shift in investor sentiment, with a potential preference for stability and income generation amidst ongoing uncertainty. This defensive stance is becoming more evident as investors seek safer, more predictable returns in the face of broader market volatility.

One glimpse of solid returns is coming from the SIA International ADR Report, where both Chinese and European equities are housed on the SIA platform. Here, we find many great names, many of which have been the center of discussion in past Daily Stock Reports. Names like Alibaba (BABA), Tencent Holdings (TCEHY), Siemens (SIEGY), KE Holdings (KE), and Gold Fields (GFI) have all been technically reviewed and can be found on the SIA platform for those interested in diving into the international arena as a diversification from United States equities. In the attached clipping from the SIA Models page, we have also illustrated the gains that have been materializing on the SIACharts Hypothetical 5-ADR Model, where the gains have been piling up. Here, we find a Compound Annual Growth Rate of 28.35% against a benchmark index, the iShares MSCI ACWI EX US Index ETF, of 6.02%. This concentrated 5-stock model highlights the pocket of strength still manifesting within the international equity market. Here, names like Embraer (ERJ), Verona Pharmaceuticals (VRNA), Sea Ltd. (SE), Rolls Royce (RYCEY), and QIFU Technology (QFIN) have all exhibited strong relative strength as well as strong absolute performance, with YTD rates of return of 37.80%, 45.11%, 21.95%, 45.76%, and 5.20%, respectively (gross of fees).

Over the past month, several global markets have shown varying degrees of performance, with China Hong Kong (FLHK) leading the pack, up by 8.99%. Close behind, Turkey (TUR) posted a solid return of 7.86%, and China Mainland (FLCH) saw a gain of 6.96%. European markets also showed strength, with Germany (FLGR) at 6.70%, Italy (EWI) at 6.42%, and Spain (EWP) returning 5.96%. Other countries such as Poland (EPOL), Belgium (EWK), and Switzerland (FLSW) also posted notable gains, with returns of 5.84%, 4.40%, and 4.23%, respectively.However, markets in the Americas and other Asian countries faced challenges, with the United States (FLQL) down by 7.96%, followed by Australia (FLAU) at -7.70% and Thailand (THD) at -7.87%. In Latin America, Brazil (FLBR) and Argentina (ARGT) saw declines of -1.66% and -1.42%, respectively. Asian markets, including Taiwan (FLTW) and Indonesia (EIDO), were also down by -2.94% and -3.43%, respectively. The Middle East, with Saudi Arabia (FLSA), dropped by 4.34%.

Overall, the global performance reflects strong gains in select emerging markets, particularly in China and Europe, while many developed markets, especially in the U.S. and Australia, experienced negative returns over the past month.