Signs of a Wall Street sell-off are all over the place, but US stocks might well survive another week relatively unscathed if investors keep betting on sectors less vulnerable to an economic downturn.
Pressure for a correction in the stock market has been building up in the past few weeks as the euro and oil prices fell in tandem, knocking down shares of energy companies and dollar-sensitive multinationals.
Still, investors have averted a broad sell-off by diving into shares of companies that are less vulnerable to the economic cycle, including well-known defensive sectors such as utilities and household products, but also large-cap companies with steady earnings performance.
That strategy may hold the market afloat for a little longer. But with the end of the Federal Reserve’s easy money policies just around the corner, investors are becoming more sensitive to risk in general.
“There is good reason for a pause, there is good reason to be conservative in here, and there is good reason to raise some cash ahead of a summer correction and a better buying opportunity,” said Richard Ross, global technical strategist with Auerbach Grayson in New York.
The sharp sell-off in commodities markets earlier this month was seen by many as the first warning sign of a coming market correction.
Next month’s end of the Fed’s quantitative easing is expected to knock down the value of stocks, commodities and the euro.