This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. Not every firm will be able to raise their prices (to protect profit margins) without losing too many customers. Companies without strong brand loyalty are susceptible to consumers switching brands, a trend that intensified during the pandemic. Many dividend aristocrats – companies that have increased their dividends each year for at least 25 consecutive years – are part of the consumer staples sector.
- Broadly speaking, consumer staples are essential products that we use daily such as food, beverages, household and personal care products.
- While no stock is completely immune to market volatility, consumer staples stocks tend to decline much less during corrections.
- This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular.
Building a defensive investment strategy might help protect you from greater losses during a recession or economic downturn. Investing in defensive stocks is one starting point, but it’s just part of the puzzle; you can further reduce your risk with a diversified portfolio containing a variety of holdings that are not all subject to the same market risk. If you are looking for a place to stash your cash during tough times, forget about your mattress. When the market goes into panic mode, this part of the equity markets isn’t normally a source of worry. We clearly have seen how grocery and discount stores have done during the pandemic.
In addition to strong cash flows, these companies have stable operations with the ability to weather weakening economic conditions. They also pay dividends, which can have the effect of cushioning a stock’s price during a market decline. People depend on gas, electricity, water, and other utilities in daily life. Utility stocks include companies that provide or deliver these services. They are defensive because consumers still need them during an economic decline. This fact makes the prices of defensive utility stock funds less sensitive to market fluctuations.
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Managing risk with defensive stocks + a diversified portfolio
Even in a recession, consumer spending on utilities is less likely to drop, so the value of stocks in this sector remain relatively stable. You can invest in the consumer staples sector through individual stocks or ETFs. Investors looking for broad exposure to the sector usually choose ETFs for diversification and convenience. Their non-cyclical nature means that no matter where we are norwegian krone japanese yen exchange rate history in the economic cycle, the average consumer will still buy necessary consumer staples products in more or less the same quantities – regardless of their price. Whether we’re in a recession or a boom market, we’ll always need products like shampoo and toilet paper. As such, the companies that make these items are said to maintain reliable, steady growth regardless of the economy.
Companies in these sectors cater to people’s basic needs, providing goods and services that are in constant and consistent demand. In a recession, consumers tighten their belts, but they’re not likely to stop paying their electric bill, buying groceries, or skipping their prescriptions unless dire circumstances require it. Companies that produce or distribute consumer staples, which are goods people tend to buy out of necessity regardless of economic conditions, are generally thought to be defensive. They include food, beverages, hygiene products, tobacco, and certain household items. These companies generate steady cash flow and predictable earnings during strong and weak economies. Their stocks tend to outperform nondefensive or consumer cyclical stocks that sell discretionary products during weak economies while underperforming them in strong economies.
Because healthcare is a necessity and medicine and medical equipment are always in demand, this sector offers strong defensive investment opportunities. In a stock market downturn, owning defensive stocks may have advantages, but trading them can backfire. They may become overvalued during a recession because lots of people are snapping them up, driving up the share price for buyers. Trading at roughly a 40% discount to our fair value estimate, Tyson’s shares are on sale while offering a 4% dividend yield. Despite inflationary headwinds and challenges in the beef and pork segments, we don’t see any structural changes to meat markets that warrant a permanent change to profitability. We remain optimistic about a return to mid-to-high-single-digit adjusted operating margins, driven by easing input cost inflation and supply-demand rebalancing.
Further, we believe it is poised to benefit from secular premiumization trends across developed and emerging markets. While defensive sectors remain primarily stable in price throughout the economic cycle, the trade-off is that they offer less drastic growth during market upswings, compared https://www.day-trading.info/top-12-blockchain-payment-gateway-solutions/ to higher-risk, cyclical industries. Defensive sector funds are mutual funds or exchange-traded funds (ETFs) that invest in companies in recession-proof industries. These industries are called « defensive sectors » because they tend to stay stable whether the market is healthy or not.
What’s better for a dividend investor than to find a business that keeps selling the same products to the same consumers every week? On the downside, the low volatility of defensive stocks often leads to smaller gains during bull markets and a cycle of mistiming the market. Unfortunately, many investors abandon defensive stocks out of frustration with underperformance late in a bull market, when they really need them most.
A sector that is defensive in an economic downturn.
The consumer defensive sector is particularly interesting during these times of uncertainties. Let’s discuss its greatest strengths and weaknesses and how to get the best from it. The Morningstar US Consumer Defensive Index advanced 4% in the fourth quarter, trailing the market’s 11.5% return by 750 basis points. With this tepid performance, the median consumer defensive stock appears slightly undervalued, trading at a 7% discount to our fair value estimate.
Consumer Defensive Sector Realized Lukewarm Gains In Q4
That might be appealing if you’re working toward a specific financial goal or planning for retirement. Many investors include defensive stocks in their portfolios to counterbalance potential losses from more volatile https://www.topforexnews.org/brokers/fx-club-global-review-2021-2/ securities. Opinions about what percentage of your portfolio you should invest in defensive stocks vary wildly. Ultimately, it’s a personal decision based on your long-term goals and tolerance for risk.
Total CPG promotional levels jumped 10% on average over the last 10 weeks versus the same period a year ago. Within consumer defensive stocks, we highlight Tyson Foods, Estee Lauder, and Kellogg. Defensive stocks are also known as noncyclical stocks because they are not highly correlated with the business cycle. Defensive sector funds refer to mutual funds or ETFs that mainly (or only) invest in the stock of companies that tend to remain stable through all phases of the economic cycle. The utilities sector includes electric, gas, and water utilities, as well as companies that operate as distributors or producers of those utilities. Renewable energy sources like solar panels and wind turbines are also included.
Prefer to invest in the consumer staples sector via a ready-made portfolio? Syfe’s Core portfolios hold the XLP ETF as part of their diversified holdings. With Core portfolios, you can start investing from any amount and dollar cost average effectively every month.