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While 2023 has featured the return of the flight to safety trade, where Treasuries have been able to counteract some of the risks of equities, the markets have also demonstrated a few relatively unusual behaviors.
The first quarter could be marked by three separate market phases. January featured better-than-expected economic data, which resulted in risk asset prices rallying. In February, inflation didn’t cool down as quickly as expected and the markets began to price in additional rate hikes. March, of course, featured the failures of SVB Financial’s (OTCMKTS:SIVBQ) Silicon Valley Bank and Signature Bank (OTCMKTS:SBNY) that sent the financial markets into turmoil.
My research has shown that, historically, when investors seek out safe havens, they tend to land in one of two places — Treasuries, if they’re looking at bonds, and utilities, if they want to stick it out in stocks. The Treasury rotation happened, as expected, but investors didn’t target utilities over the past month. Instead, they moved into Big Tech stocks!
A Closer Look
Take a look at the performance of the S&P 500 along with the tech and regional banking sectors in 2023.
Tech stocks already had a bit of a tailwind working in their favor when the SVB collapse occurred. When regional banks started plunging, the gap between the performance of tech and the S&P 500 actually got larger! The path of utilities was comparatively choppy and delivered almost no outperformance relative to the S&P 500 over the same time frame.
This is a phenomenon that isn’t new. In fact, something similar occurred during the Covid-19 bear market in 2020.
Tech stocks, especially the FAANG names, were leading the market in the run-up to the Covid recession. For roughly a month, the entire equity market plunged, but look at how the tech sector performed relative to the S&P 500. It essentially kept pace with the broader market throughout the drawdown and then grabbed the mantle of market leadership again when the government dropped its multi-trillion dollar stimulus package on to the economy.
The difference this time is that tech stocks aren’t just matching the market during periods of volatility. They’re actually outperforming it — and by a wide margin! This may be a good thing for tech stock investors, but not so much for intermarket dynamics.
Why Are Investors Looking Into Big Tech Stocks?
It’s understandable that investors are leery of government debt following a 30% drawdown in long-term Treasuries in 2022, but it’s important to remember that this was the anomaly, not the norm. Last year was the only time in history when Treasuries didn’t act as a counter-risk asset to equities. If you look historically at almost any high-volatility period, you’ll see Treasuries, in most cases, protecting against some level of downside risk. The probability of government debt falling significantly again when stocks are correcting is quite low.
Investors may be rotating into Big Tech names right now for safety because it’s familiar. It’s happened multiple times since we came out of the financial crisis, but that doesn’t mean it’s necessarily the correct move. Treasuries have been, perhaps, the most consistent asset class to provide portfolio protection in times of high volatility. It’s happened already in 2023, and conditions favor it happening again if the economy starts to falter, unemployment shoots higher or credit spreads start blowing out.
The notion that companies such as Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) could provide more safety than U.S. government debt in market downturns is both irrational and troubling.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the biedexmarkets.com.com Publishing Guidelines.
Michael A. Gayed is the Publisher of The Lead-Lag Report, and Portfolio Manager at Tidal Financial Group, an investment management company specializing in ETF-focused research, investment strategies and services designed for financial advisors, RIAs, family offices and investment managers.
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