Investors Seek Defensive Assets Amid Growing Volatility in US Stocks
Investors Look for Safe Havens as US Stocks Become More Turbulent
Volatility in US stocks has prompted investors to search for defensive assets, but finding a place to hide may be more challenging this time. The Cboe Volatility Index, which measures investor nervousness, reached its highest level in almost seven months, reflecting the decline in the benchmark stock index. While the stock market is still up 10% year-to-date, it has dropped 8% from its peak in late July. However, traditional safe-haven assets like utilities and consumer staples have also been affected by the recent downturn in the S&P 500.
Limited Options for Weathering the Storm
The scarcity of assets that can protect investors during market volatility presents a challenge. The Japanese yen is at its lowest point against the dollar in about a year, and US government bonds are on track for their third consecutive annual loss. Yields on the benchmark 10-year Treasury, which move inversely to bond prices, are currently at their highest level since 2007. This has led investors to seek safety in the dollar, gold, and short-term debt. However, even these options may not provide the desired level of security in the current environment.
A Challenging Environment for Diversified Portfolios
According to Angelo Kourkafas, a senior investment strategist at Edward Jones, diversified portfolios are facing a challenging environment. The turmoil in the bond market has dampened risk appetite and increased the cost of capital for companies. Federal Reserve Chairman Jerome Powell’s comments about the possibility of tighter policy have added to investor apprehension. Additionally, concerns about the Middle East conflict expanding and disappointing earnings reports from companies like Tesla have contributed to the heightened volatility in both stocks and Treasuries.
The Week Ahead: Earnings Reports and Defensive Sectors
The upcoming week will be busy for markets, with earnings reports from major companies like Microsoft, Alphabet, Amazon, and Meta Platforms. These companies have been the driving force behind the S&P 500’s growth this year. However, defensive sectors such as utilities, consumer staples, and healthcare have suffered due to higher Treasury yields. Analysts at UBS Global Wealth Management note that safe-haven assets have not performed as expected in response to conflicting growth data and geopolitical tensions.
Investors Seek Alternatives for Protection
Despite the challenges, investors still have some options for hedging against market volatility. Gold prices have surged since the start of the conflict between Israel and Hamas. The Swiss franc, another safe haven asset, is near its highest level against the euro in years, while the dollar has gained 5% in the last three months. Some investors are also turning to short-term Treasuries and money-market funds for attractive returns. UBS analysts recommend a preference for five-year duration over 10-year to earn yield and mitigate the risk of further yield increases.
Overall, investors face fresh uncertainties in the current market environment. The combination of geopolitical tensions, rising bond yields, and potential stock market losses has prompted a search for defensive assets. However, finding effective protection may prove to be a greater challenge this time around.