A Strange Rotation

Equity indices have been trending lower since the start of the conflict. This is hardly surprising given the energy shock and its impact on the global economy. However, movements within the indices themselves are more unexpected.

These include -4% for the S&P 500 and -6% for the Stoxx 600 so far in March. This is where we currently stand in the third week of the Middle East conflict. Indeed, a relatively limited decline, considering the consequences for the global economy and for indices that were trading near record highs before the conflict began.

Even more surprising are the shifts within indices. Indeed, in this climate of renewed risk aversion, one would expect defensive sectors to outperform. However, that is not the case this time. Healthcare and staples (consumer basics) have been underperforming since the beginning of the month, while tech has outperformed.

An upside-down market

The first factor explaining this is that a rotation was already underway in recent weeks: indeed, fears of AI disruption had prompted investors to seek safe havens. They had therefore turned towards more traditional sectors of the economy. Consequently, investors were already positioned in defensive stocks.

Furthermore, many companies in the consumer staples sector have reported disappointing results in recent weeks. They are facing both consumers who are no longer willing to absorb price increases and changes in consumption patterns (notably linked to GLP-1). The healthcare sector is under pressure from the Trump administration, which aims to reduce costs for Americans (drugs, insurance, etc.).

Finally, while tech has outperformed since the start of the month, its performance remains negative. The Magnificent 7 index is now down over 10% from its peak on October 29.

The 60/40 provides no protection

The other striking fact in this sequence is the decline in bonds. Typically, when tensions rise, investors tend to seek refuge in government bonds. This is the whole point of the 60/40 portfolio (60% equities, 40% bonds): when equities fall, the shock is cushioned by a rise in bonds.

However, in this specific case, investors are bracing for higher inflation and are forced to bury their hopes for rate cuts. As a result, yields are rising. And when yields rise, bond prices fall. The US 10-year yield has risen by about 30bp since the outbreak of the conflict in the Middle East. According to Bloomberg, March is currently the worst month for Treasuries since October 2024.