Stocks are right near their all-time highs.
However, one of the biggest headscratchers has been the nature of the stock market rally.
Specifically, the more conservative sectors like health care have been outperforming the more volatile cyclical sectors.
If people feel good about the economy, they should hunger for risk and invest in more economically sensitive names.
However, investors have been doing the exact opposite month after month this year.
Morgan Stanley’s Adam Parker talks about this in a new note titled “The Definition Of Insanity”:
Doing something over and over again and expecting a different outcome? Once again, high-beta stocks, cyclicals and smaller stocks underperformed in a strong market during April. In a break from the prior three months, junk narrowly beat quality while value beat growth.
One explanation for this discrepancy could be that income-oriented investors are also pouring into the stock market for “bond-like” investments since interest rates are so low. Parker address this:
Equity markets were up in April, and once again traditional areas of equity risk-taking, such as small stocks, cyclicals and high-beta stocks, all lagged the broader market. This is the atypical market behaviour we have been writing about repeatedly since June of 2012. The pattern of risk-on behaviour at the aggregate market level versus risk-off behaviour within equities has been in place throughout 2013 to date. It happened again in April. The only difference from prior months in 2013 is that junk slightly outperformed quality in April. To the extent that investors are being driven into equities by an absence of yield in the bond markets, they appear to be favouring less-risky cohorts – continuation the trend that has lasted for some time and one we think will remain driven by quantitative easing. Economic data appear sufficiently strong to ease fears of a pronounced slowdown, yet weak enough for QE to continue (indefinitely).
It’s worth noting that while the outperformance of conservative sectors is counterintuitive, it’s not unprecedented. According to stock market historian Laszlo Birinyi, a defensive sector like health care, consumer staples, and utilities are often top performers during up years.