We are firmly into fall and football season. If you are a fan like me, you love it when your favorite team has the ball, right? When the offense is on the field, you are more confident that you’ll score. The defense does score occasionally, but not nearly as often. Well, sometimes in investing the defense can score more than the offense.
Defensive Sectors Taking the Lead
Our partners at LPL Research posted an interesting article on their blog last week titled “Defense Takes the Field.”
According to LPL, over the past few weeks, capital has flowed out of technology and other cyclical areas that are associated with growth, and moved into more defensive sectors.
Defensive sectors are compromised of companies that are expected to hold up better, if the economy slows down or enters a recession. Three big ones are consumer staples, because people still have to buy necessities, utilities, because we still have to keep the lights and heat on, and healthcare, because we keep going to the doctor even when money is tight.
Analyzing Defensive Sector Performance
Take a look at these charts.
They are meant to compare the relative strength of those three defensive sectors to the S&P 500 Index. If you follow the black line, you will see upswings and downswings which are representative of when these sectors are outperforming or underperforming the broader market.
If you notice in the middle of the charts, a dotted gray line goes through all three. That is the last time those defensive sectors entered an upswing. That was early 2022, when the broader market entered a bear market. At the far right, you can see we entered another upswing.
That’s not to say that we are about to enter another bear market, or even a recession. But, as LPL points out, it does show investors are losing their appetite for risk and rotating to more recession-proof or less volatile areas of the market.
Long-Term Investment Strategy Comparison
Now, let’s take a look at one more chart.
This shows the performance of a hypothetical $100,000 investment in 1994 in three strategies. The orange line is simply the S&P 500 Index. The black line is a defensive basket, defined as the consumer staples, utilities, and health care sectors, and the blue line is a rotation between the two, based on when the defensive basket was in a downtrend or an uptrend.
You can see this sector rotation would’ve paid off big time. This makes the case that active management in your portfolio can be beneficial.
Disclaimer and Market Outlook
Of course, this material is for general information only and is not intended to provide specific investment advice. To determine which investments may be appropriate for you, you should work with a financial advisor.
LPL Research does not believe that the recent shift to defense it a big threat to the longer-term bull market, but it does suggest a bumpier ride in the next few months, and that sometimes, the best offense is a good defense.
The opinions voiced in this video and blog are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Advisor Alliance. Independent Advisor Alliance and GenWealth Financial Advisors are separate entities from LPL Financial.
