{"id":3280,"date":"2016-06-10T19:00:32","date_gmt":"2016-06-10T23:00:32","guid":{"rendered":"http:\/\/162.223.13.186\/~zacksim\/time-to-invest-defensively\/"},"modified":"2022-02-26T13:22:14","modified_gmt":"2022-02-26T13:22:14","slug":"time-to-invest-defensively","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/time-to-invest-defensively\/","title":{"rendered":"Time to Invest Defensively?"},"content":{"rendered":"

The title of this week\u2019s column suggests I\u2019ve turned bearish\u2014I haven\u2019t. <\/em>We\u2019ve said all year that we expect middling, but positive, returns from equities in 2016. In my view, we\u2019re likely to see returns in the mid-single digits. Growth is slow, but it\u2019s still growth. Also, as there are more tailwinds than headwinds occurring, we think corporate earnings will bounce positively in the second half of the year.
\nStill, there\u2019s a compelling argument that we\u2019re in the late phases of this bull market and economic cycle\u2014an argument that holds water. There\u2019s also historical precedent (which I\u2019ll discuss below) that suggests defensive sectors and categories of stocks (like food processors and health care providers) will tend to outperform during sluggish times. For those who are a bit more bearish than others, you may want to reallocate investments in your portfolio.<\/p>\n

Why Favor Defensive Sectors Late in the Cycle?<\/strong><\/p>\n

Over time, defensive sectors like Consumer Staples, Utilities and Health Care have tended to outperform during recessions and bear markets. Since 1963, each of those lower volatility sectors has almost always outperformed cyclical sectors during a bear market or recession (according to Vanguard Investment Counseling & Research). These include sectors such as Materials, Industrials, Energy, and Information Technology. Logic explains why: defensive sectors consist of companies that produce and sell goods for which demand changes little over time. Therefore, in a recession, many consumers strapped for cash will still spend on health care, \u2018staple\u2019 goods (paper towels, diapers, processed foods) and utilities (water and electricity).<\/p>\n

Cyclical sectors experience opposite dynamics. During a slowdown, these companies pare back on activities such as building new factories while consumers hold off purchasing things like cars and luxury items. The relative earnings growth of defensive vs. cyclicals in down times tends to favor defensive sectors versus cyclicals, and stocks have historically reflected that shift.<\/p>\n

A recent data point from ETF.com suggests an investor shift may be underway. Over the past two weeks, the Consumer Staples Select Sector SPRD ETF gained $333 million in net inflows relative to the much lower $105 million that flowed into the Consumer Discretionary Select Sector SPDR fund. Institutional investors also signaled some movement to the defensive\u2014it was reported that the number of new institutional buyers (hedge funds, mutual funds) of Campbell Soup increased 92%, while new institutional owners of Coca Cola jumped 81%. If you\u2019re wondering why that\u2019s meaningful, consider this: Campbell Soup, a \u2018defensive play\u2019 was down 20.71% in 2008 while the S&P 500 fell nearly twice that (-40.18%), and Coke was down 29.55%.<\/p>\n

Is Now a Good Time to Rebalance?<\/strong><\/p>\n

Arriving at the heart of the matter, the question is: should investors rebalance away from cyclicals toward defensive sectors? I still think it\u2019s too early. To me, the odds of the economy and corporations surprising to the upside are about the same as the odds they perform in-line with expectations. In either outcome, it\u2019s mostly growth across the board which means no bear market or recession. This suggests that defensive sectors may not necessarily shine on a relative basis, just yet.<\/p>\n

Bottom Line for Investors<\/strong><\/p>\n

A well-diversified portfolio should have exposure to defensive and cyclical sectors at all times, which gives you a 100% probability of being allocated to \u2018defensive\u2019 names during difficult market periods. Where you tilt your portfolio is a tactical decision that you should base on where you see the economy and the market in the cycle, and what sectors and styles you think will perform best given economic circumstances at hand.<\/p>\n

As we enter late cycle stages of the bull and economic expansion, I think it makes sense to favor larger cap, dividend paying names with stable earnings outlooks and defensive sectors as well. As the outlook turns less rosy, a tactical choice would be to incrementally shift to defensive, but not overly so. Just as defensive sectors tend to do well on a relative basis during challenging times, they also tend to under-deliver when growth is better than expected. I\u2019m not convinced these times are as challenging as many believe them to be.<\/p>\n

\n","protected":false},"excerpt":{"rendered":"

The title of this week\u2019s column suggests I\u2019ve turned bearish\u2014I haven\u2019t. We\u2019ve said all year that we expect middling, but […]<\/p>\n","protected":false},"author":1,"featured_media":4122,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59,60,63,71],"tags":[],"class_list":["post-3280","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-professionals","category-institutional-investors","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/3280","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=3280"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/3280\/revisions"}],"predecessor-version":[{"id":11328,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/3280\/revisions\/11328"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=3280"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=3280"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=3280"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}