Don’t add risk exposure, stick to defensive stance for now: strategists

Strategists at Stifel and Barclays urged investors to maintain a defensive investment strategy amid a challenging market environment in notes this week.

Both firms are cautious about increasing risk exposure, with a focus on defensive sectors in light of current economic signals.

Stifel analysts argue that recent optimism around the Federal Reserve’s potential rate cuts is misleading. “Fed cuts are a red herring,” they wrote, warning that bull steepening in the yield curve is likely to hurt equity markets.

According to Stifel, “bull steepening yield curves have historically led to the weakest stock markets.”

The firm highlights that economic slowdowns have always been preceded by bottoming 10-year to 2-year “bull steepening” curves, indicating potential challenges ahead.

As a result, Stifel advises investors to stay with “Defensive Value” industries, particularly those that tend to outperform during bull steepening periods, such as Pharmaceuticals, Biotech, Household Goods, and Healthcare Equipment & Services.

Barclays echoes that cautious sentiment in its note to clients, maintaining a neutral stance on cyclical versus defensive sectors.

They see “no rush to re-risk” despite current soft data, and are waiting to see clearer benefits from rate cuts before adjusting their strategy.

The bank’s analysts note that they have held this neutral allocation since early summer, stating that they are “not in a hurry to change it” until demand starts to pick up in 2025.

“We wouldn’t be looking to get more defensive at the moment, and have a bias towards adding back to cyclicality in coming months, so long as our base case eventuates,” added Barclays.

However, they also highlight potential opportunities in technology and aerospace/defense sectors, as well as financials like banks and diversified financials.

Both Stifel and Barclays advise a defensive approach for now, with a focus on sectors that can weather economic uncertainty.