Diving into the Details of Defensive Growth Underperformance in Recent MonthsOctober 15, 2013
We’ve noted before the recent underperformance of “defensive growth” stocks (Health Care and Consumer Staples stocks) so we thought we’d dive into the details to get a better understanding for the drivers of this relatively sudden turn in performance, since these two sectors (and Health Care in particular) have performed admirably this cycle.
We can see in the table below that Health Care and Consumer Staples have on average performed in line with or better than the MSCI World Index over the last four years:
However, over the last three months these two sectors are near the bottom of the list:
From the table below, we can see what drove the performance over the last four years for these sectors. Specifically, it was that the average stock in Health Care and Staples was down less than the overall market on days when the MSCI World Index finished in the red. The fact that our “defensive growth” sectors underperformed cyclical sectors by a wide margin on up stock market days is less relevant, because they lost soo much less than cyclical sectors on down days.
Looking at the last two months, we see a dramatic divergence relative to the last four years. For starters, the average sector performance has been muted on both down and up stock market days (volatility has been suppressed). Secondly, Health Care and Staples have performed about the same on down market days compared the last four years, but have gained a lot less on up stock market days than has been typical. Finally, cyclical sectors like Financials, Materials and Energy have lost much less on down stock market days over the last two months compared the last four years. Stocks in these sectors tend to be highly levered and are generally of lower quality. But as we can see in the below table, Cyclicals have recently traded more like “defensive growth” companies over the last two months than the highly levered, economically sensitive companies that they are.