Investors sought out high-yielding stocks in August

Consumer staples such as Kellogg were among the most in-demand US stocks in the past month. Photo / AP

American investors flocked to defensive and high-yielding sectors of the S&P 500 index in August to shelter from the US-China trade war and dimming global economic growth or make up for slumping income from the bond market.

Utilities rose just over 4.6 per cent for their best month since February 2017, while the consumer staples sector — home to the makers of everyday products such as Kellogg and PepsiCo — edged 1.6 per cent higher.

These two sectors are among the most defensive, whose earnings are likely to hold up during an economic downturn. High-yielding real estate stocks gained 4.6 per cent, their best showing since March.

The broader market as measured by the S&P 500 fell 1.8 per cent.

The push into the trio of leading sectors balanced a desire for yield and safety. Utilities, real estate and consumer staples stocks offer a higher dividend yield than all other sectors, apart from the volatile energy sector.

The flight to defensive stocks reflects a demand for safer assets that was also seen in the bond market in August, where prices rallied and yields fell to record lows on some fixed-income benchmarks.

Longer-dated Treasury bonds were yielding less than short-term US government debt by the end of the month, a yield curve inversion that has been a harbinger of recessions in the past.

Headlines on the escalating trade war contributed to a series of sharp equity market sell-offs during the month, including the three worst trading days of the year so far. This made the month the most turbulent August in four years, according to the Vix volatility index, Wall Street's "fear gauge".

Liz Young, director of market strategy for BNY Mellon Investment Management, said investors "are looking at the inverted yield curve and weaker consumer numbers and that starts to add to a more concerning outlook than we had earlier in the year".

Utilities, real estate and consumer staples pay consistent dividends, so some investors use them as a proxy for bonds. The three sectors are also now the leading sectors of the market during the past 12 months.

"Now is the time to play things a little closer to the vest," said Steve Chiavarone, a portfolio manager for Federated Investors. "Higher tariffs could certainly impact corporate earnings."

The defensive positioning comes as forecasts for US corporate profits slide. Companies in the S&P 500 are set to increase profits 2.4 per cent this year, according to the latest FactSet estimates, far less than the 7.7 per cent anticipated at the start of the year.

As the latest earnings season drew to a close, FactSet calculated that earnings per share for S&P 500 companies contracted 0.4 per cent in the second quarter. Coming on top of a 0.2 per cent drop in the first quarter, that marked an "earnings recession", defined as two consecutive quarters of negative growth.

"As we get further and further into the year, the prospect of getting a trade deal this year is less likely," Young said. "The markets are on the precipice of joy and pain and it only takes a tweak to send us one way or the other."

Written by: Richard Henderson

© Financial Times