The Week Ahead on Wall Street: Defensives, Energy and Dividends Rise in Popularity

The new volatility in US equities is causing some investors to retreat into sectors of the market that have been relatively strong in a brutal year for equities, including energy stocks, defensive names and dividend payers.

The S&P 500 is down 9% since mid-August, partially reversing a summer rebound after Federal Reserve Chairman Jerome Powell warned that the central bank’s resolute fight against inflation could spell trouble economic.

While few sectors of the market were spared during the index’s nearly 18% plunge this year, some have fared relatively better, a buoyant hope among investors that will mitigate further losses to their portfolios if stock prices assets remain volatile.

Sectors such as consumer staples, healthcare and utilities fell less sharply than the broader S&P 500 throughout the year. Investors tend to turn to companies in these regions during times of uncertainty, expecting consumers to continue spending on medicine, food and other necessities despite the economic turmoil.

The energy sector remains one of the biggest gainers in 2022 with a 44% year-to-date gain, despite a recent pullback.

Meanwhile, the S&P 500 Dividend Aristocrats Index, which tracks companies that have increased their dividends each year for the past 25 years, has fallen about 10% this year, a less severe decline than the decline. overall market.

“These kind of Eddie stable names could tread water in a downsloping market,” said Chad Morganlander, portfolio manager at Washington Crossing Advisors, who manages a strategy involving companies he expects they are increasing their dividends in the coming months, notably Johnson & Johnson. and Clorox Co.

The S&P 500 ended the week with a loss of 3.3%. The index fell 1.1% on Friday after early gains from a U.S. jobs report that showed a labor market that may be starting to ease gave way to concerns about the gas crisis in Europe.

The rally that propelled stocks for most of the summer has taken a hit, with the S&P 500 now up about 7% from its mid-June low. Should the index hit new lows again this year, it would be the fourth time stocks have gained at least 6% before pulling back and hitting a new low for 2022.

A rapid rebound in bond yields has further complicated the outlook for equities, putting technology and other growth stocks that are more sensitive to rising yields under particular pressure.

“The decline in equities … and the rise in yields are consistent with our view that investors had underestimated the willingness of central banks to tighten policy at current inflation rates,” UBS Global Wealth Management wrote this week.

The company recommends skewing portfolios toward defensive stocks, including pharmaceutical stocks, and so-called quality companies whose attributes include above-average dividend yields and a low debt-to-equity ratio.

Fears that the Fed will struggle to rein in inflation – which jumped to its highest rate in more than four decades this year – was another catalyst for investors to diversify. A roughly 20% rise in Brent has helped make energy stocks a particular favorite this year, while putting upward pressure on consumer prices.

“I’m not convinced that equity investors fully appreciate the impact of inflation on their portfolios,” said John Lynch, chief investment officer at Comerica Wealth Management, citing the economic fallout from rising rates and the erosion of profit margins. costs.

He has bought more shares of energy companies in recent weeks, betting that supply constraints will continue to support oil prices. Lynch also acquired stocks in the healthcare sector, which he said is more reasonably priced than other defensive sectors in the market.

Of course, the areas that have outperformed this year carry their own risks. Energy prices have been volatile and could fall if a recession weighs on global demand, putting pressure on energy stocks.

Some defensive areas, particularly the utilities and commodities sectors, are trading at price/earnings valuations significantly above their historical averages.

Investors could also abandon defensive plays if the economy avoids a downturn.

Horizon Investment Services owns shares of utility companies, but “we’re not just on defense,” said Chuck Carlson, the company’s chief executive.

“Some of these areas are quite expensive,” Carlson said. “You are paying for this defense.”

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)