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Financial market volatility soared last week as new tariffs for Canada, Mexico, and China went into effect, and investors reacted to a potential slowdown in the U.S. from growing economic uncertainty. European developments added to the volatility as announcements for additional fiscal spending sent shivers through the bond market but provided optimism for equity investors in certain sectors. Winners were European defense stocks, international equities, and U.S. dividend payers. Losers were non-U.S. bonds, the consumer discretionary sector, and momentum stocks. Let’s examine each of these moves in more detail.
European Defense Stocks Rally
European defense stocks rally
Bloomberg Finance LP; Garth Friesen
President Donald Trump’s recent policies—such as suspending military aid to Ukraine and urging Europe to take more responsibility for its own security—have had major impacts on the global defense industry. Declining U.S. support for Ukraine has undermined confidence in American security guarantees, prompting European nations to ramp up defense spending. Meanwhile, U.S. defense stocks like Lockheed Martin have slumped amid fears of reduced demand for American-made arms.
Over the past month, European defense sector ETFs have outperformed their U.S. counterparts. The Select STOXX Europe Aerospace and Defense ETF has jumped 27.5%, while the iShares U.S. Aerospace & Defense ETF has declined 4.6%. European defense companies like Rheinmetall AG, BAE Systems PLC, and Thales SA have benefited from the expected demand for military equipment and technology driven by government commitments to increase national security budgets.
Investors Get Defensive, Shifting From Consumer Discretionary Stocks To Consumer Staples
Consumer staples outperform consumer discretionary stocks
Bloomberg Finance LP; Garth Friesen
There is growing evidence that the U.S. economy is losing momentum. Consumer confidence is slipping, retail sales are weakening, and both new and existing home sales are stagnating. Meanwhile, the inflation outlook is becoming more uncertain. As consumers grow cautious, their spending habits shift from discretionary purchases to essentials, prompting investors to adjust their stock market exposure accordingly. Necessities like food and hygiene products take priority over luxury goods and big-ticket items like cars. Companies such as Walmart, Costco, and Procter & Gamble, which cater to budget-conscious consumers, are well-positioned to perform relatively well if the economy enters a soft patch in the coming quarters..
The Consumer Staples Select Sector SPDR Fund has significantly outperformed the Consumer Discretionary Select Sector SPDR Fund over the last month. The defensive characteristics of consumer staples stocks helped push the ETF 4.3% higher, while the ETF focused on discretionary stocks fell 10.6%.
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