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The Market's Measure
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Feeling the Chill of Recession

It’s summer … why worry?

Ah, summer! Long and warm are the days and thoughts of a winter freeze are far from mind.

Or not. There are signs—small and niggling perhaps—that recession is closer than many thought. Take the Atlanta Federal Reserve Bank’s daily deflation probability as an example. These probabilities represent the likelihood of declines in the Consumer Price Index over a 5-year period as estimated from the prices of Treasury Inflation-Protected Securities. The Fed’s data for the 2016 to 2023 period now shows a definite rebound in the odds of deflation. You can trace deflation’s likelihood in the chart below. 

Now, deflation isn’t necessarily recession. Deflation refers to shrinkage in the money supply while recession is a retraction in economic activity. It’s unusual, though, to experience deflation without recession.

Perhaps more readily seen is how investors seem to be girding themselves for recession by rotating into defensive issues such as utilities and health care stocks. These stocks generally outperform late in the economic cycle as the first whiffs of an impending slowdown are perceived.

In the past month, the share price of the Utilities Select Sector SPDR (NYSE Arca: XLU), an exchange traded fund comprised of 29 utility stocks included in the S&P 500, has spiked 5 percent. XLU hasn’t been the only utility fund favored by investors. The Vanguard Utilities ETF (NYSE Arca: VPU), the iShares U.S. Utilities ETF (NYSE Arca: IDU) and the First Trust Utilities AlphaDEX ETF (NYSE Arca: FXU) have all notched market-beating returns in the past 30 days.

Over that same period, the Health Care Select Sector SPDR (NYSE Arca: XLV), the oldest and largest fund in the segment, has more than doubled the return of its parent S&P 500 index. Similar gains have been scored by the Vanguard Health Care ETF (NYSE Arca: VHT), the iShares U.S. Healthcare ETF (NYSE Arca: IYH) and the Fidelity MSCI Health Care ETF (NYSE Arca: FHLC).

All the more reason to cut your summer beach time short to rejigger your portfolios? Perhaps not, but a review of your allocations for recession sensitivity ought be noted on your Things To Do list for your eventual return.

You ARE returning, aren’t you?

Brad Zigler is WealthManagement’s Alternative Investments Editor. Previously, he was the head of Marketing, Research and Education for the Pacific Exchange’s (now NYSE Arca) option market and the iShares complex of exchange traded funds.

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