Nothing happens in a vacuum, especially concerning stock price movement. Markets anticipate and warn as “smart money” subtly influences key sectors’ price trends. Driven by these small but significant influences (“the little things”), defensive stocks warn for weeks or months before bear markets begin or become widely recognized.

Certain stocks tend to perform relatively well during recessions compared to others due to their defensive characteristics and resilience to economic downturns. Money shifts out of one sector and into another as the best money managers detect subtle changes in the financial landscape earlier than others and make changes. Thus, as they begin to outperform, defensive sectors reflect these actions and serve as valuable warnings of a shifting economic or market trend.

When the “smart money” anticipates an oncoming recession, this anticipation shapes the trend as they shift money to defensive sectors ahead of the crowd. Defensive sectors tend to outperform the market as a whole BEFORE the economic changes become widely recognized. Those who focus on shifting sector strength are ahead of changing economic conditions. They adjust accordingly and welcome these changes as opportunities.

Here are some sectors that outperform during recessions and the reasons behind that outperformance:

1. VIX and VIX derivatives like VIXY, UVXY, VXX, and the rest. Recessions bring increasing uncertainty for stocks and the companies they represent. Rising uncertainty brings fear. Fear begets increased volatility. VIX moves higher as volatility increases.

2. Gold and Precious Metals: Precious metals like gold are often considered safe-haven assets during economic uncertainty, including recessions. Gold has historically maintained its value or even appreciated during market turmoil and currency devaluation. Investors may turn to gold and other precious metals as a hedge against inflation, currency depreciation, and financial instability.

3. Consumer Staples: Companies that produce essential consumer goods such as food, beverages, household products, and personal care items tend to outperform during recessions. Demand for these products remains relatively stable even when consumer spending declines because they are necessities rather than discretionary items. As a result, companies in the consumer staples sector tend to have more consistent earnings and cash flows during economic downturns.

4. Healthcare: Healthcare stocks are defensive because demand for healthcare products and services tends to be relatively unaffected by economic cycles. People continue to require medical care, prescription drugs, and healthcare services regardless of the state of the economy. Pharmaceutical companies, medical device manufacturers, and healthcare providers are examples of businesses within the healthcare sector that outperform during recessions.

5. Utilities: Utilities are defensive stocks because they provide essential services such as electricity, water, and natural gas that consumers and businesses need regardless of economic conditions. Demand for these services tends to be relatively stable, providing utility companies with predictable revenue streams and cash flows even during recessions.

6. Discount Retailers: During recessions, consumers often become more budget-conscious and prioritize value-oriented retailers over higher-priced alternatives. Discount retailers that offer low prices and a wide range of products tend to benefit from increased foot traffic and sales during economic downturns. These companies may include large discount chains, dollar stores, and warehouse clubs.

These above sectors outperform during recessions because they offer products or services consumers need even when economic conditions are challenging. Their defensive characteristics, such as stable demand, predictable earnings, and reliable dividends, make them attractive to investors seeking safety and stability during uncertain times.

As a recession or a severe bear market phase approaches, the best money managers are paying close attention to “the little things” and have already begun shifting money from aggressive to defensive market sectors, influencing those sectors ahead of the significant problems.

With that in mind, we’ll examine what these defensive sectors tell us in April 2024. The pattern is clear once we know what to look for.

First, though, let’s revisit the August 1987 peak as $VXO (the 1987 equivalent of $VIX) rose right into the August 1987 peak:

As SPX has been climbing since last October, VIX has been rising (instead of falling as “normal” for a rising SPX) and closed on Thursday, April 4, 2024, at a New High since October 2023 in

A repeat of what occurred in August 1987: