Protection, energy, dividends in favor as the market booms again According to Reuters

© Reuters. FILE PHOTO: Raindrops hang from a Wall Street sign outside the New York Stock Exchange in Manhattan in New York City, New York, U.S., October 26, 2020. REUTERS/Mike Segar

By Lewis Krauskopf

NEW YORK (Reuters) – Fresh volatility in U.S. stocks is sending some investors plunging into relatively strong market sectors in a brutal year for stocks, including big-name, energy stocks. defense and dividends.

The currency is down 9% since mid-August, reversing part of a summer rally after Federal Reserve Chairman Jerome Powell warned the central bank’s fight against inflation could lead to pain. economic pain.

While some sectors of the market have seen relief in the index’s nearly 18% sell-off this year, some have fared relatively better, with some active investors hoping for further losses. losses in their portfolio if asset prices remain volatile.

Sectors such as consumer food, healthcare, and utilities fell less than the broader S&P 500 throughout the year. Investors tend to attract companies in these sectors during uncertain times, expecting consumers to continue to spend on medicines, food and other necessities despite the situation. economic instability.

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

At the same time, the S&P 500 dividend aristocracy, which tracks companies that have increased their dividends every year for the past 25 years, is down about 10% this year, a drop less severe than the market’s decline. shared.

Chad Morganlander, portfolio manager at Washington Crossing Advisors, who manages a strategy involving companies where he expects to increase dividends in the coming months, said: ” & Johnson (NYSE: ) and Clorox (NYSE:) Co.

The S&P 500 ended the week down 3.3%. The index fell 1.1% on Friday after an early rise from the US jobs report suggested the labor market may be starting to ease, giving way to worries about the European gas crisis. Europe.

The rally that has fueled stocks for most of the summer has made a big impact, with the S&P 500 now up about 7% from its mid-June low. If the index again makes new lows this year, it will be the fourth time stocks have rallied at least 6% before retracing and marking a new low for 2022.

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

UBS Global Wealth Management wrote this week: “The fall in equities … and rising yields are consistent with our view that investors have underestimated central banks’ willingness to in tightening policy at the current rate of inflation”.

The firm recommends tilting the portfolio toward protective companies, including pharmaceutical stocks and so-called quality companies that have attributes including above-average dividend yields and debt ratios. on low equity.

Worries that the Fed will struggle to bring down inflation — which has risen at its highest rate in more than four decades this year — is another catalyst for investors to diversify. A gain of about 20% has helped energy stocks be a special favorite this year, while also putting upward pressure on consumer prices.

“I don’t believe equity investors have a good idea of ​​the impact of inflation on their portfolios,” said John Lynch, chief investment officer at Comerica (NYSE: Wealth Management). higher cost-return ratio.

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

Of course, the areas that perform better this year come with their own risks. Energy prices have been volatile and could slide if a recession hits global demand, putting pressure on energy stockpiles.

Some defensive sectors, particularly the utilities and essentials sectors, are trading at valuations from earnings significantly above their historical averages. Investors may also abandon the defensive play if the economy avoids a recession.

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

“Some of those areas are pretty expensive,” says Carlson.

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