The New Defensive Sector

Utilities, real estate, consumer staples. Long considered the defensive play in equities when uncertainty rises.  Looking back on 2020, though, and for several years prior, we see a very different pattern.  Year to date, utilities and real estate have logged negative returns of 7-8%, while consumer staples, which everyone flocked to at the onset of the pandemic, are up a mere 5.3%.  

Moreover, the utility ETF XLU fell precipitously following news of the Coronavirus, dropping 36% from late February to late March.  The recovery that followed from the March 23 lows, still places XLU at  14.8% below its pre-Covid highs. The story in no better in real estate, with the IYR falling 57% peak to trough and currently down 10.24% on the year.  Even the consumer staples ETF (XLP) following not-so-distant memories of store shelves emptied of paper products, cereal, pasta and cleaning supplies, fell 16% at the outset of the crisis and stands just 5.5% up on the year.

So if the traditional defensive sectors were not where investors were hiding in troubled times, where did they go?  In a word, technology.  The XLK towers above other sectors this year, with a total return to date of 35.8%.  But what's most interesting is that the XLK actually fell less than traditional defensive sectors like utilities and real estate, during the early days of the crisis, before rallying back hard in the ensuing months.

Here's what has been driving tech equity performance and why it's still relevant to investors today. Large tech companies showed their resilience to the crisis, with many companies posting solid revenue and earnings growth in Q1 and Q2 vs similar periods in 2019.  Investors now increasingly believe that Amazon, Netflix, Apple and Microsoft, among others, are impervious to cyclical employment and broad measures of consumer demand.  With interest rates on hold, the discounted present value of tech earnings creates considerable value to support earnings multiples and valuations.

While diversification is essential to portfolio management, tech very likely will continue to outperform amidst growing uncertainty around the election, vaccine development and the restart of the economy.

A Fresh Start

Wow.  It's been a while since I last posted.  Looking at the date of my last article, like four years!  It's time to reengage.  I'll try to keep the blog postings coming, with at least two per week, so there will be something new to read if you return to the site as often as you like. Some posts may be short, some much longer.  As in the past, I'll keep the focus on business and economics, but will also include more posts on the human experience in an increasingly harsh and contentious society.  

Something has changed in America that threatens our connectedness and our respect for one another. No doubt, the discord has been amplified over the past four years of the Trump administration, but it started long before in a bitter and divisive congress and an anachronistic two-party political system.  America has drawn sides, liberal, conservative, Democrat, Republican and all the news of the day is somehow politicized.  As you might have guessed, I'd like to keep this site free of politics, as best as can be done.  There's plenty of that on the internet. It's my hope that we can look at issues on this site fresh, unburdened by political ideology.

I welcome and encourage your comments, although I ask that postings be civil and respectful. No one should be so naïve as to expect a world without controversy or where there is universal agreement on all issues.  But the world needs to restore intelligent, well mannered conflict.  Let's find it here, together.