Filed under: Industry, Economic data
“Normally, you hear that in the event of a recession, defensive sectors such as healthcare and consumer staples are the best place to be,” note technical experts Dr. Marvin Appel and Gerald Appel in their Systems & Forecasts. But are they?
“The reason these are called ‘defensive’ is that consumer demand for these goods does not shrink by very much during recessions. As such, corporate profits should hold up better than average. Consumer staples has the added advantage of being a sector with below-average volatility generally.
“Data from Ned Davis Research confirms this bit of investing folklore. Briefly, the two best-performing sectors in the six and 12 month periods following the onset of the five recessions from 1973 through 2001 were healthcare and consumer staples. So far, so good.
“The problem is that just because the performance of these sectors during recessions has been better than other areas of the S&P, that does not mean that their returns have been very good.
“Specifically, in the six months following the begin of a recession, the average gain in healthcare was 2.6% and in consumer staples, 1.4%. These returns are not enough better than those available from a money market to warrant taking the market risk.
“If you were to wait a full year from the start of a recession, the average gains from healthcare were 5.6% and from consumer staples, 3.0%.
“I once asked a portfolio manager why he chose to move into defensive sector rather than just into cash when he forecast a recession. He answered that he’s paid to be invested, not to be in cash.
“Of course, if you’ve a specific bullish outlook on these sectors, you should feel free to invest in them. Otherwise, the take home message is: if you are thinking of moving assets into healthcare or consumer staples as a generic defensive measure, move to cash instead.”
Everyday, Steven Halpern’s TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation’s leading financial newsletter advisors.
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