Shift from Tech to Defensive Plays Boosts DJIA to Records

Following a month of market volatility, defensive sectors now appear to be favoured over technology stocks, contributing to the DJIA's outperformance.

The Great Rotation, to Safety

Previously, the "Magnificent Seven" large tech companies had led the way higher, and analysts discussed a potential "great rotation" into small-cap stocks, anticipated to benefit from lower interest rates later in the year. However, significant declines at the start of August halted this trend, though markets did recover before month-end. With August witnessing the most volatility in four years, the S&P 500 gained 2% while failing to set new highs. In contrast, the DJIA rose 1% to a fresh record high entering September. Nasdaq lagged with a more modest 0.7% increase over August, as its largest tech firms struggled to bounce back from earlier losses.

The leading tech stocks experienced the steepest falls in years and could not recover fully in subsequent weeks. Meanwhile, sectors like consumer staples, healthcare, and real estate post the strongest returns, traditionally associated with safety. Investors looked ahead to anticipated interest rate cuts and favoured dividend-paying stocks sensitive to rate movements.​

Will the Divergence Persist?

The US markets were closed on the first trading day of September. Futures contracts suggested caution ahead of the important labour market data being released later in the week. However, as with previous periods, the Dow outperformed other high-risk indices. Nvidia's earnings, which beat estimates but did not satisfy investors, contributed to reduced enthusiasm for AI. This allowed the US' premier blue-chip index to surpass its peers.

With the Federal Reserve all but promising an interest rate cut in September, investors will watch economic data closely in the coming two weeks to assess if the figures match rate cut expectations. Historically, September can be difficult for stock markets as summer optimism subsides, and a weakening jobs market may prompt expectations of further easing. However, it could also signal that the economy faces challenges that outweigh the benefits of lower rates. One positive for tech may be Apple's scheduled unveiling of its new iPhone. However, this could hurt Apple if deliveries do not meet forecasts. Overall, the Dow could remain a beacon for traders who are increasingly skittish and looking for safety.

Dow Jones in Accelerating Trend

The Dow Jones has been trending upward in recent months, seeing increasing momentum after breaking above the 41000 handle. Following a minor pullback to 38,400, prices have remained above the key upward channel trendline. If this support holds, the index may reach 44400 per the measured-move projection, with interim resistance expected at 42,500 and 43,200. These represent the inverse Fibonacci retracement levels of 38.2% and 61.8%. Conversely, a move towards 40000 could expose the index to further declines going forward.​

Source: SpreadEx Wall Street

Key Takeaways

In August, defensive sectors such as consumer staples, healthcare, and real estate outperformed technology stocks, contributing to the DJIA's gain more than other indexes. The downturn in large tech companies halted their earlier gains, leading investors to favour dividend-paying stocks seen as safer in an environment of anticipated interest rate cuts. As the Federal Reserve signals further rate reductions and economic data is watched closely, the Dow may continue to appeal to cautious investors seeking shelter from increased market volatility.​