The Fear Factor: Why Stocks Are Dropping
Right now, we’re bracing for continued policy chaos. The headlines alone are enough to keep us defensive—government shutdown risks, debt ceiling battles, and tax cut extensions all remain unresolved. Combine that with whiplash-inducing tariff threats, and we get an environment where businesses and consumers are more likely to “wait and see” rather than spend and invest. That hesitation alone can be enough to slow economic momentum, even before any real damage is done.
At 21x earnings, the S&P 500 is still expensive. If fear continues to dominate, we could easily see a 10% pullback before valuations find solid ground again. Even the Federal Reserve can’t do much to fix Washington’s dysfunction, making the market’s current churn between 5,700 and 6,000 on the S&P 500 likely to continue until some policy clarity emerges.
From the October 2023 low to the February 2025 high, a 38.2% retracement is sitting at the $5350 level. There is seemingly nothing to stop the market from dropping, although we do have a series of economic data that could be bullish this week. The Volatility Index (VIX) is sitting at levels where reversals typically occur, but we know this is no typical market.
Defensive Sectors Are Leading—For Now
With uncertainty driving markets, defensive sectors are holding up the best. Health care, consumer staples, utilities, and real estate have all outperformed in recent weeks. These areas tend to attract capital during volatile periods because they provide essential goods and services, making them less sensitive to economic cycles.
Health Care (XLV) – Stable earnings and defensive demand make it a go-to during market turmoil.
Consumer Staples (XLP) – Essential products keep sales steady even in downturns.
Utilities (XLU) – Regulated returns and consistent cash flow attract risk-averse buyers.
Real Estate (XLRE) – A hedge against inflation, though higher interest rates can be a challenge.
At the same time, financials and cyclicals are struggling as we shy away from sectors that rely on economic growth and rising rates to outperform.
Financials are still a sector that should outperform in a deregulation market, but the worry of a recession is putting pressure on consumer spending, which in turn hurts financial stocks like Visa (V) or American Express (AMEX).
The Tactical Playbook: How to Position Now
Given the market’s current setup, the best strategy is to stay balanced. The right mix includes low-beta, low-volatility ETFs (USMV, SPLV) while maintaining exposure to defensive sectors. If fear continues to dominate, these areas should hold up best.
However, the script could flip quickly. If policy clarity emerges—whether through tariff resolution, a settled debt ceiling, or pro-growth measures—markets could rotate sharply into cyclicals. That means you may want to keep a watchlist of sectors like industrials, financials, and discretionary stocks that could outperform if the landscape improves.
For now, staying long but defensive remains the best way to navigate this uncertainty.
