Relative strength has shifted to defensive value sectors as global stocks struggle
The healthcare sector bounced off relative support and is now back above its 200-day moving average versus ACWI
Traders should monitor risk-off trends heading into a year of continued central bank tightening
Defensive sectors are finally showing their luster. Healthcare, consumer staples, and utilities have all seen relative strength in recent weeks as Omicron variant fears permeate global markets.
Is Omicron the Culprit?
Meanwhile, once high-flying areas like technology and consumer discretionary have come under pressure as we head into year-end. While there have been some economic restriction measures taken in some countries and municipalities, perhaps the latest COVID fears are simply an excuse to rotate out of expensive names and into pockets of value.
Monitoring Relative Strength
Our Global Cross Asset Market Monitor report is sent to clients each Monday. The report covers the spectrum of securities: stocks, bonds, commodities, and currencies. It also dives into breadth readings to help determine the underlying strength of various markets. We eye credit markets and liquidity indicators, too.
Standing out to us right now is something not seen much in recent years: relative strength from defensive sectors. We highlight healthcare this week. The featured chart shows healthcare relative to the All-Country World Index (ACWI) in local currency terms.
Healthcare Finds Support
After being a market leader following the Great Financial Crisis, the sector lost its relative steam starting in 2016. The last five-year period has seen trendless action versus global equities. The sector finds support at 0.4 times ACWI. It bounced off that key level once again a few weeks ago.
Featured Chart: Healthcare Sector Perks Up
Healthcare also broke above its declining relative 200-day moving average. Traders should keep a close eye on this defensive sector in the months ahead—further relative strength could be a sign of risk-off behavior.
Prior Periods of Global Equity Weakness
We can look to recent history as a guide. Stocks struggled in late 2018 (recall the S&P 500 dropped about 20% in the fourth quarter of that year), and healthcare equities sharply outperformed. More recently, the COVID crash featured tremendous alpha from the sector. When investors flipped the switch from caution to aggression later in 2020, healthcare shares underperformed.
A Trendless 2021
2021 has been a year of muted relative returns. The latest uptick is just that—a meager uptick. We need to see follow-through to confirm true risk-off behavior. Nevertheless, relative strength from the entire group of defensive value sectors in the last two months is something to note heading into a new year that looks to feature tough comps and hawkish central bank policy.
Healthcare Not Purely Risk-Off
A final point is that the healthcare sector is sometimes tough to decipher. It is composed of large pharma companies that are truly defensive while biotech is usually seen as a very risk-on niche. A flight to quality has taken place in the last month with shares of JNJ, PFE, AMGN, and UNH in the black while the S&P Biotech ETF (XBI) has suffered.
The takeaway: Defensive sectors such as healthcare, staples, and utilities exhibit relative strength week over week. Discretionary sharply underperformed. Defensive value has been strong relative to cyclicals and growth. This is cautious behavior as we wrap 2021.
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