Optimism about the resilience of America's economic rebound has taken a dent over the past 24 hours, resulting in the nastiest spill for the Dow in almost three months.
Investors seemed to dwell on Wednesday's Federal Reserve commentary, which included a dour outlook for GDP and unemployment. Thursday's unemployment-benefits report, which showed a better-than-expected 1.54 million claims across last week, did little to allay those concerns.
Investors also might have been unnerved by accelerating COVID-19 caseloads in numerous states, even if political headwinds hinder the possibility of renewed state-ordered shutdowns.
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Wall Street's recent rally was repelled almost entirely across the board: Just one of the S&P 500's components – Kroger (KR, +0.4%) – finished in the black, with the index itself finishing 5.9% lower to 3,002. The Dow was even worse, shrinking 6.9% to 25,128, marking its worst loss since March 16. The Nasdaq, meanwhile, declined 5.3% off Wednesday's all-time high to 9,492.
The big question: Did the market just knock off some froth or start another drastic downleg?
SEE ALSO: All 30 Dow Stocks Ranked: The Pros Weigh In
"The market was ripe for some profit-taking after soaring more than 40 percent since the March lows," says Bankrate.com Chief Financial Analyst Greg McBride. "Add in the reality of a long way to go in the economic recovery and the ever-present worries about a resurgence in the virus, and you have the recipe for a selloff."
"The huge market drop may be reminiscent of what we saw in the month of March, but it takes the S&P 500 only back to where it was the last week of May."
So, what now?
While we frequently espouse the merits of trusting your buy-and-hold instincts, no one would be blamed for shifting some assets to safer vehicles. Given how uncertain things are now, it makes sense to strike a careful balance between offense and defense – a needle these five picks thread. Interestingly, the tech-heavy Nasdaq and scores of its top stocks are acting more defensively than many traditional stores of protection.
But if you're looking for ways to hedge against downside, you could do worse than monitor what actual hedge funds are doing. We've recently examined what the institutional "smart money" is doing – namely, what stocks they collectively favor most. Unsurprisingly, they're big on blue chips, and these 25 names are at the top of their lists.
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