Time to Invest Defensively?

Time to Invest Defensively? The title of this week’s column suggests I’ve turned bearish—I haven’t. We’ve said all year that we expect middling, but positive, returns from equities in 2016. In my view, we’re likely to see returns in the mid-single digits. Growth is slow, but it’s 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. More... ------------------------------------------------------------------ [New Zacks Market Predictions Revealed] "Hot off the presses," Zacks' completely updated Stock Market Outlook is available for download today absolutely free. This 24-page report is packed with key forecasts and facts that every investor should consider: • Which sectors are hot and which are not? • What industries within those sectors most merit your attention? • Is the spring market turnaround likely to last? • Where will the S&P 500 and Russell 2000 be at year's end? [Download This Special Report Right Now for FREE >>] ------------------------------------------------------------------ Still, there’s a compelling argument that we’re in the late phases of this bull market and economic cycle—an argument that holds water. There’s also historical precedent (which I’ll 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. Why Favor Defensive Sectors Late in the Cycle? 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, ‘staple’ goods (paper towels, diapers, processed foods) and utilities (water and electricity). 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. 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—it 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’re wondering why that’s meaningful, consider this: Campbell Soup, a ‘defensive play’ was down 20.71% in 2008 while the S&P 500 fell nearly twice that (-40.18%), and Coke was down 29.55%. Is Now a Good Time to Rebalance? Arriving at the heart of the matter, the question is: should investors rebalance away from cyclicals toward defensive sectors? I still think it’s 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’s 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. Bottom Line for Investors 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 ‘defensive’ 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. 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’m not convinced these times are as challenging as many believe them to be. So which sectors are most likely to perform best in current conditions? Find out in the new, just released Stock Market Outlook Report. Today I am making it available for you to [download free of charge.] Three sectors have been upgraded since the last Outlook report was issued and four have fallen and should be considered with caution. You will also see the hottest and weakest industries within each sector, a great place to start your search for stocks to buy or sell. This 24-page briefing discloses updated Zacks forecasts for where the S&P 500 and Russell 2000 are headed as well as U.S. GDP growth—which should be the top fundamental in investor's minds. What are the odds of recession? Have oil and materials prices bottomed? What about international investments? Such answers are invaluable for managing and allocating your portfolio. To make the most of these forecasts, I encourage you to access them right now. [FREE Download – New, Revised Zacks Stock Market Outlook Report] Best Regards, Mitch Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals. This communication is for informational purposes only and nothing herein should be construed as a solicitation, recommendation or an offer to buy or sell any securities or product, and does not constitute legal or tax advice. The information contained herein has been obtained from sources believed to be reliable but we do not guarantee accuracy or completeness. Zacks Investment Management, Inc. is not engaged in rendering legal, tax, accounting or other professional services. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney- client relationship. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal , tax, or accounting counsel. To unsubscribe from receiving Zacks Investment Management's Market Insight e-mail newsletter, [click here]. To contact us by mail: Zacks Investment Management Attn: Wealth Management Group One South Wacker Drive, Suite 2700 Chicago, IL 60606 [Zacks] You are registered to receive this "Zacks Investment Management" e-mail newsletter at {EMAIL}