There are encouraging signs that the United States could see higher business profits than expected. As a result, investors are more interested in defensive sectors that can withstand turbulence better and yield high dividends. They also like them because they are less concerned about geopolitics and the Federal Reserve’s efforts to control inflation.
Despite a decrease in overall market performance, the S&P 500 and the Dow Jones‘s top performers performed well this month. These sectors include utilities, healthcare, consumer staples, real estate, and real property.
Their attractiveness has increased over the past months as investors worry that the Federal Reserve will strangle the American economy by aggressively tightening policy to combat rising consumer prices. Moreover, many Wall Street institutions fear that aggressive Fed action could lead to a recession.
Short-term rates for several maturities of government bonds rose above longer-term yields in U.S. Treasury markets last month, warning us to be cautious. Inverted yield curves have been a hallmark of past recessions. The consequences of Ukraine’s current situation are still a concern for investors.
“Conservative stocks are successful because investors perceive all the obstacles to growth,” Walter Todd (chief investment officer at Greenwood Capital) stated.
While the S&P 500 is Down around 8% this year, utilities have gained over 6%, commodities are up 2.5%, healthcare is down 1.7%, and real estate is down 6%.
Procter & Gamble (NYSE: PG)and Johnson & Johnson (NYSE: JNJ), two of the biggest names in the consumer goods sector, will release their quarterly results next Wednesday. Investors will also be watching Netflix (NASDAQ: NFLX) and Tesla Motors (NASDAQ: TSLA) quarterly results.
This year, signs that U.S. corporate earnings are higher than expected could be a boon for other market sectors such as travel and banking and high-growth technology names.
Defensive stocks have proven their worth in the past. For example, DataTrek Research has shown that the S&P 500 has been outperformed by the staples, utilities, and healthcare sectors by between 15 and 20 percentage points in times of economic uncertainty.
New York Life Investments’ multi-asset team has changed its portfolios to staples, healthcare, and utility stocks over the past few weeks. It also decreased its exposure to industrials and financials.
Goodwin stated that a more hawkish Federal Reserve “raised concern about the possibility of this economic cycle being shorter and hastened [our allocation] move towards these defensive equities sector.”
The Federal Reserve can quickly increase interest rates and reduce its nearly $9 trillion balance sheet if inflation rises above 2%. Due to the conflict in Ukraine, commodities prices have risen, which has also pushed up inflation.
Mona Mahajan (an Edward Jones senior investment analyst) says that defensive stocks can act as inflationary hedges when prices rise. Customers will have to purchase their essentials, healthcare, and energy bills regardless of price increases “when you consider where there is a bit more pricing power,” Mahajan said.
Investors don’t have to be pessimistic when it comes to the economy. On the contrary, many feel that if the market continues to perform well, the momentum will transfer to other areas.
Art Hogan, National Securities’ chief market strategist, estimates a 35% chance of a recession this year. However, it is not our base case. “Hogan estimates that “when economic worries dissipate, I anticipate defensives’ sponsorships will also vanish.” “
Due to recent advances, there has been a rise in the value of defensive stocks. Refinitiv Datastream reports that the utility sector trades at a price-to-earnings ratio of 21.9x future earnings expectations. That is the highest ever recorded level and well above the average of 18.3x over the past five years.
The five-year forward P/E for the healthcare sector is at a premium of 5%, while the staples sector trades at an 11% premium. Todd says that a mean reversion period for this transaction is possible. These places could continue to outperform as long as there are concerns about growth. “
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