As recession fears rise and the fear index plummets toward levels last seen during the March 2020 pandemic panic, U.S. and global equities are taking a significant hit. Investors are beginning to feel the pressure as trade tensions escalate, with China and the European Union, key U.S. trading partners, doubling down on retaliatory tariffs. With no trade resolution in sight, the market continues to spiral lower.
Technology stocks have been hit especially hard as investors aggressively rotate out of risk assets. Ahead of Monday’s open, futures are signaling further losses. The Technology Sector SPDR ETF (NYSE:XLK) is now down 21.5% year-to-date and 25% off its 52-week high as of Friday’s close. Meanwhile, as of Friday's close, the S&P 500 has fallen nearly 18% from its recent peak.
With this level of volatility and uncertainty, many investors might wonder: Which sectors typically outperform during recessions and times of fear? While no corner of the market is entirely immune to sell-offs, history shows that two sectors, Consumer Staples and Utilities, tend to provide relative safety and stability during downturns.
Consumer Staples: A Classic Defensive Play
The Consumer Staples Select Sector SPDR ETF is down just over 7% from its 52-week high as of Friday’s close, much less than the broader market. That relative strength reflects the sector’s defensive nature. It also offers a 2.6% dividend yield, adding an income cushion during volatile periods.
Consumer staples include everyday essentials like toothpaste, household cleaning products, food, and beverages. No matter how bad the economy gets, people still need to buy these goods. That steady demand benefits companies like Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO), Walmart (NYSE:WMT), and Johnson & Johnson (NYSE:JNJ), giving the sector a reliable edge over more cyclical industries like tech or discretionary retail.
Though the sector hasn’t been immune to the sell-off, its milder decline signals defensive positioning. That said, investors should proceed with caution. On Friday, XLP closed below its rising 200-day moving average and looks set to open lower on Monday. Watching top holdings such as Costco (NASDAQ:COST), Walmart, and Coca-Cola for signs of stabilization and relative strength could help investors identify when the sector begins to attract renewed interest as a haven.
Utilities: Stability and Dividends in Uncertain Times
The Utilities Select Sector SPDR ETF has also shown notable resilience. Year-to-date, it is down just 1.5% and about 11% from its 52-week high, considerably less than the S&P 500’s drawdown. Like consumer staples, utilities benefit from their essential nature and reliable revenue streams, which help them weather economic storms better than most sectors.
The utilities sector includes companies that provide critical services like electricity, natural gas, water, and sewage systems. These services are needed regardless of economic conditions, making the sector a historically strong performer during downturns. XLU also offers an attractive 3.06% dividend yield, which can appeal to income-focused investors in turbulent markets.
However, the sector hasn't escaped the broader market pain. On Friday, XLU fell more than 5%, and based on futures, it looks set for another tough session on Monday. Many of its top holdings, including Southern Company (NYSE:SO), Duke Energy (NYSE:DUK), and NextEra Energy (NYSE:NEE), are trading near or below their 200-day SMAs. Investors may want to monitor these names closely to see if they begin to outperform relative to the market, signaling a shift toward defensiveness.
Positioning for Growth Through Stability
Consumer Staples and Utilities have historically been two go-to sectors, among others, for investors seeking stability during market turbulence and recessionary periods. While the current sell-off is intense and the geopolitical backdrop remains uncertain, these two sectors might offer a measure of safety, and possibly even opportunity, for long-term investors looking to weather the storm.
As always, watching for signs of relative strength and stabilization in top holdings can help confirm whether capital is rotating into these traditionally defensive sectors.