MFS: Monthly Equity Market Topics

by Ross Cartwright, Lead Strategist, Investment Solutions Group, MFS Investment Management

An examination of market trends and dynamics across the global equity markets.

In brief

• Defensives not defending
• Good news is bad news

Defensives not defending

Since the end of April, after recovering from the banking mini crisis in March, cyclical sectors have significantly outperformed the defensive sectors. While one can understand cyclicals such as utilities (-11.4%) and real estate (-10.3%) suffering as the return of the term-premium drove longer-dated interest rates higher, defensives such as consumer staples (-11.3%) and health care (-7.9%) have also substantially underperformed the MSCI World index (-1.3%).^₁ Throughout this period, the consensus was that economies were slowing and some, such as Europe and the United Kingdom, may already be in recession. This should be supportive of defensive stocks as investors gravitate towards safety.

Focusing on staples, and despite the US’s recent 4.9% Q3 GDP reading, it is difficult to argue we are in a recovery or expansion phase where investors would expect staples to struggle against the benchmark. Interestingly, staples started to sell off as bond yields rose in May and then again from August until the end of October. Are they a bond proxy? Maybe, but they only yield 2.9%,^₁ 50 basis points more than the MSCI, so it would appear, unlike utilities and real estate, this is not being driven by yields. However, as a defensive asset or hedge against poor equity performance, at current levels, bonds now provide an alternative.

GLP1’s have also been floated as a reason for the slide, and while there may well be some impact, it is too early to tell how consumption patterns will shift. Perhaps fewer sales of salty or sugary snacks, but more of other types of food? Any GLP1 impact should not affect toiletries, hygiene, cosmetics and household products, all of which are part of this universe.

Usually, their defensive nature and stable earnings profile result in staples trading at a premium. Excluding the COVID period, staples are trading near their 10-year lows relative to the MSCI World, indicating that at current levels some of these stocks may be oversold and offering opportunities, especially if growth concerns re-emerge.

Good news is bad news

Halfway through earnings season, results have been surprising to the upside. According to FactSet, as of 25 October, 49% of S&P 500 companies have reported with 78% beating expectations, marginally above the 5-year average of 77%. However, while companies have reported earnings that are, in aggregate, 7.7% higher than expected, this is below the 8.5% 5-year average. Sentiment is weak as companies beating expectations are not seeing a positive reaction to their share prices while those missing are getting punished, particularly if they trade on a higher multiple. Despite the extraordinary US GDP print, the US equity market seems anxious about the implications for rates and inflation. Good news on the economy is proving to be bad news for equity markets.

Endnote

^₁ Source: Bloomberg.
Source: Bloomberg Index Services Limited. BLOOMBERG^_® is a trademark and service mark of Bloomberg Finance L.P. and its affi liates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

“Standard & Poor’s^_®” and S&P “S&P^_®” are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500^_® is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ Products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products.

Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or fi nancial products. This report is not approved, reviewed or produced by MSCI.

The views expressed herein are those of the MFS Investment Solutions Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as the Advisor’s investment advice, as securities recommendations, or as an indication of trading intent on behalf of MFS.