A barrage of bad U.S. economic news stoked recession fears in August, causing investors and traders to turn decidedly defensive. The S&P 500 dropped 4.5% last month, with defensive sectors such as healthcare and utilities dramatically outperforming cyclical areas. U.S. small-caps fell 7.5%, consistent with the risk-aversion theme.
Foreign stocks fared better; the MSCI World Ex-U.S. Index declined 2.7%, thanks to relative strength in emerging markets, which have been showing signs of “decoupling” from the morass of the developed world. Investors continue to seek refuge in Treasury bonds and gold, which have been the favored asset classes since stocks peaked in April (Exhibit 1).