U.S. stocks fell broadly on Friday, as an escalation in trade tensions between the U.S. and China weighed on risk assets, though areas of the market considered safer traded up on the day.
So-called defensive sectors, an unofficial collection that includes utilities XLU, +0.71% consumer staples XLP, +1.28% and real estate XLRE, -0.16% were all higher, bucking the sharply negative tone of the overall market.
These sectors — which also include telecommunications, off 0.2% on Friday versus a 0.5% drop for the S&P 500 SPX, -0.10% — are seen as more stable, and slower growing, than their cyclical peers. That group, which includes the energy and industries sectors, have a stronger correlation to the pace of economic growth, and they are seen as offering both higher growth potential, and greater risk in periods of uncertainty.
Both the consumer-staples and the real-estate sectors gained 0.6% on Friday. Utilities added 0.2%.
The weakness on Wall Street came after President Donald Trump approved tariffs on about $50 billion of Chinese goods, marking the latest escalation in the trade spat between the two countries. Beijing has said that it intends to assess tariffs on a corresponding amount of U.S. goods, while Trump said the U.S. would pursue more tariffs if China retaliates. Subsequently, Trump said there was no trade war with China.
Trade tensions have been a major driver of market action over the past several months, though there has been more rhetoric than concrete action thus far, and the issue hasn’t been enough to derail the general move higher.
The outperformance of defensive stocks on Friday comes amid what has been a weak year for the group. Telecom is down 12.4% in 2018, making it the worst performer of the 11 primary industry groups. It is followed by consumer staples, down 10.4%; utilities, off 6.5%, and real estate, which is down 3.6% year to date. The four stand as the worst performing groups of 2018 thus far, with steeper losses than have been seen in any cyclical group. The S&P 500 is up 3.5% this year.
Defensive stocks are known for their higher dividend yields relative to the overall market. That has proved to be a major factor behind their weakness in 2018, as a rise in Treasury yields this year have made the stocks less comparably attractive. The 10-year U.S. Treasury note currently yields 2.91%, and it recently topped the psychologically important 3% threshold to touch its highest level since 2011.
The defensive sectors still offer a higher yield than the overall market, although the gap between their yields and the 10-year’s has narrowed significantly, if not completely. This makes them less attractive to investors, who can get a similar yield from bonds without the higher risk that comes with equities, even less cyclical equities.
