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While nervous investors sold shares of tech stocks amid Monday’s artificial intelligence panic, they bid up the otherwise boring Consumer Staples Select Sector SPDR Fund (XLP), which surged 2.7% amid the massive risk-off shift.
The tech sector panic selloff arose from sudden fears that China's new DeepSeek AI, reportedly cheaper and faster than leading artificial intelligence giants like Nvidia Corp., would challenge domestic, high-margin, semiconductor business models.
NVDA stock sank 17% Tuesday while leading consumer staples stocks Costco Wholesale Corp. (COST) and WalMart Inc. (WMT) rose 2.8%, respectively.
XLP: The Defensive, Soft Landing, Consumer Staples ETF
Investors often favor consumer staples stocks and ETFs like XLP during periods of economic slowdown for several reasons:
Stability in Demand
Consumer staples companies produce essential goods such as food, beverages, household products, and personal care items. These products are necessities, and demand remains steady regardless of economic conditions, providing a buffer against economic downturns.
Defensive Characteristics
Consumer staples stocks are considered "defensive" because their revenues and profits are less sensitive to economic cycles compared to sectors like technology or industrials, making them attractive during uncertain times.
Dividend Income
Many companies in the consumer staples sector, like Procter & Gamble Co. or Coca-Cola Co., have a history of paying consistent and growing dividends. In a slowing economy, these dividends can provide reliable income to investors, which is especially appealing when growth stocks may struggle.
Lower Volatility
ETFs like XLP tend to be less volatile than technology-focused ETFs because of their defensive nature. This makes them a "safe haven" for risk-averse investors during market downturns.
Inflation Resilience
Many consumer staples companies can pass on higher costs to consumers without significantly affecting demand, making them more resilient during periods of inflation or rising input costs.
Technology's Sensitivity to Economic Growth
Technology stocks often have higher valuations based on future growth expectations, which can be negatively affected by higher interest rates or slower economic growth. In contrast, consumer staples stocks have more predictable earnings and are less tied to growth assumptions, making them relatively more attractive in a slowdown.
XLP and similar consumer staples ETFs act as a defensive play, offering stability, income, and resilience when the economy slows, while tech stocks, which rely heavily on growth and innovation, may underperform in the same environment