Investors seeking rapid earnings growth are unlikely to find it in consumer staples. Here I present what we saw in terms of performance of cyclical vs. defensive sectors, how Tesla’s impressive run impacts the overall market, and what to watch in 2021. Yes, Costco is a consumer defensive stock, but some believe that the business relies too heavily on subscription and membership fees, meaning that an economic downturn could convert the business into a consumer cyclical stock. The firm operates in 150 countries, with 26% of fiscal 2022 revenue stemming from the Americas, 43% from Europe, the Middle East and Africa, and 31% from Asia-Pacific. The company sells its products through department stores, travel retail, multibrand specialty beauty stores, brand-dedicated freestanding stores, e-commerce, salons/spas, and perfumeries. They’ll migrate toward defensive stocks if they think times are going to be harder than usual.
Are consumer defensive stocks a good investment?
Water, gas, and electric utilities are examples of defensive stocks because people need them during all phases of the business cycle. Utility companies also get another benefit from a slower economic environment because interest rates tend to be lower. Defensive stocks are also known as noncyclical stocks because they’re not 10 best new stocks to buy now 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. In the following charts, cyclical sectors are shown in blue and defensive sectors in green.
- There’s a constant demand for these companies’ products so they tend to be more stable during the various phases of the business cycle.
- When you invest in consumer defensive stocks, remember that you’re reaping several benefits all in one.
- Instead, they tend to buy only necessities such as food, healthcare services, and basic utilities.
- The Consumer Defensive sector comprises companies whose businesses are less sensitive to the economic cycle.
Breaking down the utilities sector
It contributed 1.63% to the overall benchmark return despite having less than a 1% weight. It is surprising that an electric car company outperformed Moderna—a biotech company that came up with a vaccine to help mitigate a global pandemic—by over 300%. An official U.S. recession requires a declaration by experts at the National Bureau of Economic Research (NBER). Recessions can’t be recognized until the country has experienced two back-to-back quarters of negative gross domestic product growth rates. They may be negligible or nonexistent if the company experiences a rock-bottom quarter financially.
How to Invest in Defensive Sector Funds
You’re looking for benefits that will stay with you whether the economy is strong or not. Remember, it’s much easier to lean into these stocks because they often stand out. At the same time, how many of these stocks should you hold at any one time? You want to hedge your bets and protect your portfolio, but how much is too much?
FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article. Walmart is a multinational retail corporation that’s grown into the largest retailer in the world over the last 50 years. Through innovation, the corporation has created a seamless shopping experience both in-store and online. It operates close to 11,500 stores in 27 countries and e-commerce websites in 10 countries. Defensive stocks are less likely to face bankruptcy because of their relative strength during downturns.
As we consider the market environment in 2021, we have a new administration in the White House, ramped-up COVID-19 vaccine distribution, additional fiscal stimulus, and pent-up demand for travel and leisure. However, at the same time we are seeing downward revisions to GDP growth forecasts, a slowing job market, and weak consumer spending. Key for the sector in 2024 may be whether sales volumes improve, with consumers coming back to more brand-name items.
The sector outperforms with the second-highest volatility of all sectors. It can keep your pockets stuffed through market turbulence, even when the wider market is struggling. People can’t cut back on consumer staples (think beverage and tobacco products, household goods, personal products and food and drug retailers). Anheuser-Busch InBev is the largest brewer in the world simple scalping trading strategy and one of the world’s top five consumer product companies, as measured by EBITDA.
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In a bid to grow sales volume and market share—and responding to input costs that eased in the past year—some companies slowed their price increases in 2023 and offered more discounts. But this led to decelerating revenue growth in the sector in 2023, which weighed on the stocks even as companies delivered better-than-feared earnings. Higher interest rates also lured many investors toward fixed income and away from dividend-paying stocks. The consumer staples sector encompasses makers of everyday items like packaged food, toothpaste, and dish detergent.
There’s a constant demand for these companies’ products so they tend to be more stable during the various phases of the business cycle. Although the economic outlook remains uncertain, consumers are likely to Bar chart trading continue to need the everyday products—from toothpaste to toilet paper— that staples companies produce and sell. When exactly sales volumes pick up may depend on the health of the consumer and economy. However, valuations in the sector remain compelling, especially given the potential for improving profit margins.
Stock Lists
Apartment real estate investment trusts (REITs) are also deemed to be defensive because people always need shelter but steer clear of REITs that focus on ultra-high-end apartments when you’re looking for defensive plays. You might also want to avoid office building REITs and industrial park REITs that could see defaults on leases rise when business slows. Brand-name soda makers may have the ability to retain or raise prices, because they face little competition from lower-cost, generic alternatives. For example, soft drink companies Coca-Cola (), Keurig Dr Pepper (), and PepsiCo () have generally experienced strong pricing power due to a lack of competitive private-label alternatives. MarketBeat has just released its list of 20 stocks that Wall Street analysts hate.
Knowing this, some investors buy defensive sector funds, such as Vanguard Consumer Staples ETF (VDC), when they think a recession will occur. Consumer staples, for instance, include businesses that produce everyday goods like food, beverages, and household items, which tend to enjoy steady demand. Healthcare is another defensive play, as medical services, treatments, and pharmaceuticals are necessary regardless of economic cycles. Real estate, particularly in sectors like residential properties, offers potential income streams and acts as a hedge against inflation. Finally, the utility sector, which provides essential services like electricity, water, and gas, benefits from its highly regulated and stable revenue streams. Defensive stock funds can reduce risk and losses in the value of your portfolio during economic declines, but these funds can still lose value during a market correction or bear market.
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