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Equity Market: Defensive Outperformed Amid Trade Fears

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In the week that ended on September 27, the equity market saw another weekly decline. The S&P 500 index and Nasdaq-100 Index has declined by 1% and 1.8%. It was the second consecutive weekly decline after three consecutive weekly rises for both indexes. Tech-heavy index Nasdaq-100 underperformed the S&P 500 Index.

Additionally, the uncertainty around trade talks could explain the fall in the equity indexes. In a new development, CNBC reported that President Donald Trump was considering an investment restriction on China. This might derail trade talks scheduled for October 10. Also, tech stocks will be most impacted if the trade talks fail. This explains the underperformance of the Nasdaq-100 Index.

A strong dollar means expensive exports

In the last trading session, the S&P 500 Index (SPY) fell below its 20-day moving average. This is the first time it has happened since August 28, 2019. Thus, an investor might expect a short-term weakness in the equity market, based on technical analysis.

If Trump’s administration imposes an investment restriction, the US dollar might get stronger. The outflow of money from China could be behind it. Notably, last week the US dollar rose 0.6%. This is its highest weekly rise since August 30, 2019. A stronger dollar could be a problem for the economy. This is because US exports will become costlier.

Equity market: defensive rose

Among sector-specific SPDR ETFs, the Consumer Staples Select Sector SPDR ETF (XLP), Utilities Select Sector SPDR ETF (XLU), and the Real Estate Select Sector SPDR (XLRE) rose 1.3%, 1.3%, and 0.4%, respectively. Notably, the defensive and high dividend yield sector ended in the green. Both XLRE and XLU have a dividend yield of 2.9%.

However, SPDR ETFs were either unchanged or ended in the red. Last week, the Procter & Gamble Company (PG) and Coca-Cola (KO) have risen 1.9% and 0.7%, respectively. PG and KO are the highest holdings of the XLP. Defensive stocks tend to outperform amid rising volatility. The CBOE Volatility index gained 12.4% last week. And Goldman Sachs expects high volatility in the equity market next month. Also, in August, these three ETFs outperformed. 

The underperformer

The Energy Select Sector SPDR ETF and Health Care Select Sector SPDR ETF declined 2.7% and 2.9%, respectively. The underperformer among the sector was SPDR ETFs. US crude oil prices and natural gas prices fell 3.8% and 5.1%. This led to a decline in energy stocks. Bearish inventories data could have caused the decline in energy commodities. Moreover, US-China trade talks might have increased bearish sentiments for these SPDR ETFs. If the US dollar gains further, oil prices could fall.

Other assets

In the week that ended on September 27, gold active futures declined 0.5%. They settled at $1,499.1 per ounce. It was the second-consecutive weekly decline for gold active futures. Usually, the equity market and gold prices are inversely related. But, if the market turmoil continues, we might see a reversal in gold prices. Also, last week was volatile for bitcoin. It lost 20.7%.

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