S&P 500 clocks 100% growth from March 2020 lows: Is it time for defensive stocks?

Major US indices posted solid weekly gains with S&P and Nasdaq setting fresh all-time closing highs.

Federal Reserve Chairman Jerome Powell’s remarks at the Jackson Hole Economic Policy Symposium seem to have given a direction to the stock markets. The investors globally were perhaps waiting to hear Powell before resuming the upwards journey ahead. The S&P 500 is already up over 100 per cent from the March 2020 lows.

Post the Jackson Hole speech, the markets finished higher closing near best levels ever. Major US indices posted solid weekly gains with S&P and Nasdaq setting fresh all-time closing highs. Small-cap Russell 2000 capped its best week since March. Most sectors were higher, with energy being the big gainer. Materials, communication services, and financials outperformed as well while industrials, utilities, consumer staples lagged with healthcare trailing.

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The markets at this point of time are also considering sector rotation. The sectors that performed over the alst 12-18 months may or may not continue to do well in the months ahead. The announcement of the huge infrastructure spendings will also play a role in the stock selection. The tussle between the defensive stocks and growth stocks may well be out in the open in the immediate future. It is better to remain diversified and reap the benefits from the performance of the quality stocks.

David Kastner CFA®, Director, Senior Investment Strategist, Schwab Center for Financial Research says, “While we may have seen a peak in the rate of economic and earnings growth—which is typical during the expansion phase of the business cycle—we think it’s premature to anticipate a peak in the level of growth. Consequently, we don’t expect defensive sector outperformance to persist. Rather, we see choppy sector leadership among cyclical-value and growth-oriented sectors—with some bouts of defensive buying—being more likely in the months to come.”

According to Kastner, for the defensives to outperform, there is still time and the reasons to remain invested in growth stocks is because:

  1. The Fed has said that while the economy is making progress toward its goal of steady inflation over 2% and full employment, it sees short-term rates remaining unchanged at least until late 2022.
  2. There is plenty of business spending likely on the way, as inventories are still very low and need to be replenished amid high demand, and capital expenditures are on the rise.
  3. Consumer confidence and spending remain strong amid improving job numbers—though the best retail sales numbers are likely behind us, one measure of consumer confidence has wobbled recently, and continued improvement in the labor market needs to be watched carefully.

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