One of the most common misconceptions among retail traders and investors (that’s you and me, people who trade and invest with their own money from home, rather than those who are paid to play with other people’s money) is that those that work in the market are all super intelligent people, making complex calculations all day.
In my nearly twenty years in dealing rooms, I learned that while most people who work in that environment are smart, it is the ability to react quickly to changing conditions that sets them apart. That often means abandoning the ideas arrived at from detailed analysis and just going with your gut. Never underestimate the impact of emotion and mood.
That is particularly important to remember right now, as the stock market swings wildly in both directions. Those moves are often based on news that can be analyzed, but the size of the reaction is more about the view of traders going in than it is the substance of the news.
Take yesterday, for example, when stocks skyrocketed on reports that the imposition of some proposed tariffs would be delayed. That is obviously welcome, but did it justify such a massive swing in the major indices?
It really changed nothing. There is already evidence, both in data and corporate views, that the existing tariffs are damaging the two most dynamic economies in the world, the U.S. and China. Not making that situation worse is a good thing, of course, but the fundamental conditions that have led to the bond markets flashing a usually reliable indication of impending recession are still there.
Traders, desperate for some good news, latched onto that news though, and scrambled to buy. The problem is that the overall mood of pessimism is still there, and this morning it looks as if yesterday’s rally was just a good opportunity for those that haven’t done so yet to sell. If you did so yesterday, or earlier, the question most investors face is: Where should we hide?
The market distortions caused by central banks around the world since the last recession make some of the traditional hiding places such as bonds riskier than they would usually be, leading many to look for alternative investments that are not particularly growth sensitive. But when a move is driven by mood, as this one is to this point, it can swing just as wildly in the opposite direction, so quitting stocks altogether is not always a smart idea.
There is, however, one traditional hiding place that makes sense in this kind of market.
Utilities are a well-known safe haven when things get hairy, and in the current circumstances, diverting some funds into that sector makes even more sense than usual. Even in a slowing economy, people still use power, so utility stocks are typically less sensitive to economic data than most. With interest rates as low as they currently are, though, and with the chance of further Fed rate cuts increasing, they offer another advantage.
The Spider Utility Sector ETF, XLU, currently offers a 30-Day SEC yield of just over three percent. That is nearly double the 1.6% yield on the 10 Year U.S. Treasury Note. The fact is that whatever the economic and market conditions in the world, there is always an enormous pool of capital seeking yield. The more uncertain things are and the more pessimistic the mood of traders, the better a relatively stable investment with a three percent yield looks.
Investing some of the cash generated by stock sales in something like XLU reduces the risk of missing out when the mood swings and stocks bounce back, but the yield and the appeal of the sector if it doesn’t offer some protection. It is, therefore, something to consider.