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3 Consumer Staples Stocks for Defensive Investing

Tesla’s total return for the year was 743%, by far the highest in the benchmark. 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%. For this analysis, I used FactSet’s economic sector classifications for the Russell 1000 with the sectors categorized as shown in the table below.

A sector that is defensive in an economic downturn.

The healthcare sector is another defensive area that remains resilient even during economic downturns. Demand for healthcare services, pharmaceuticals, and medical products remains relatively stable. These companies generate steady cash flow and predictable earnings during both 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. Investors sometimes rush into defensive stocks after a downturn in the market even though it’s too late. These failed attempts at market timing using defensive stocks can significantly lower the rate of return for investors.

In 2024, the top three performers were cocoa, coffee and gold, up 341%, 87% and 27%, respectively. Cocoa futures’ outstanding performance, driven by a perfect storm of poor weather and black pod disease, exceeded even bitcoin, up 122%, and the S&P 500®, up 25% for 2024. Despite this, the world’s top cocoa-growing countries are scaling back cocoa production due to farmers’ inability to fully reap Different types of stocks the benefits of global price increases. Further depressed supply, as farmers shift their focus to more profitable crops, could lead to a continued cocoa rally well into 2025 and beyond.

What unique risks does the consumer staples sector face?

KO is a beverage company that manufactures, markets, and sells various nonalcoholic beverages. It sells its products under Coca-Cola, Diet Coke/Coca-Cola Light, Coca-Cola Zero Sugar, Fanta Orange, Sprite, Sprite Zero Sugar, Schweppes, Thums Up, and other popular brands. Mr. Ben Becker is a Senior Analytics Product Specialist at FactSet based in Chicago. In this role, he is responsible for implementing and supporting Analytics clients, specifically in the portfolio analysis and quantitative space. He joined FactSet in 2016 and prior to that, worked on the Transition Team at Robert W. Baird & Co., and led marketing for SmartUQ LLC, a start-up quantitative analytics company. While evaluating tactical sector allocations for 2021, it is important to re-examine the year we just had and how the uncertainty did not benefit defensive names as we’d normally expect.

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They are also known for their lower volatility compared to more cyclical or growth-oriented stocks. This lower volatility is attributed to the stable demand for the products or services these companies provide, which tends to be less influenced by economic fluctuations. Therefore, during times of economic uncertainty, investors often turn to defensive stocks as a strategy to protect their portfolios. Moreover, it provides a steady income stream and a conservative portfolio of stocks with diversified risks and returns. For this reason, defensive stocks are often seen as a type of ‘safe haven asset​​’ which investors may buy and hold as a way to hedge against portfolio risk.

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For example, during the Covid-19 pandemic in 2020, Reckitt Benckiser reported its highest ever sales growth of 12%, which was driven by its hygiene and cleaning products. Defensive companies may lag behind other firms during periods of economic expansion due to the stability of demand for their products and services. The surge in demand for discretionary goods during economic booms can sometimes detract from the profits of defensive companies. It is worthwhile to note that while defensive stocks are generally less risky than more cyclical alternatives, they are not entirely immune to market fluctuations.

• Given that food is essential for human survival, investors may hold a supermarket stock in their trading portfolio, as this type of business tends to be consistent and reliable all-year round.
• Confirm details with the provider you’re interested in before making a decision.
• This financial stability allows them to weather economic challenges more effectively than companies with more variable revenue streams.
• Defensive stocks tend to perform better than the broader market during recessions but they often perform below the market during an expansion phase due to their low beta or market-related risk.
• Defensive companies tend to make products or services that are essential to consumers.
• Sector rotation is a top-down investment approach where investors move money from one sector to another based on the market situation.

Key areas to watch include tariffs and the strength or weakness of the US dollar. Regarding tariffs, most consumer staples products are made in the US, so direct effects of tariffs might be limited. Products like alcohol from Mexico and items with Chinese components (e.g., packaging and small appliances sold by consumer staples retailers) could see price increases. On https://www.forex-reviews.org/ the bright side, I believe that after living through changing tariff policy in recent years, consumer staples businesses may be better prepared for tariffs now.

The regular income provided by dividends can be particularly appealing to income-oriented investors, providing a stable source of cash flow. These sectors tend to exhibit more stable revenue streams and are less affected by economic fluctuations. The stock could be expected to lose only about 1% if the market drops 2% in a week. But a 2% price gain in the market for one week leads to an expected increase of just 1% for a defensive stock with a beta of 0.5. Defensive stocks accommodate greed by offering a higher dividend yield than can be made in low-interest-rate environments.

• The basic characteristic of a defensive stock is that it is not affected by the movements in the stock market.
• Defensive stocks are shares of companies in non-cyclical industries that tend to remain stable during economic downturns, such as utilities or consumer staples.
• As an investor you should take calculated amounts of risks so that you can go through the hard times and enjoy the benefits.
• For example, during the Covid-19 pandemic in 2020, Reckitt Benckiser reported its highest ever sales growth of 12%, which was driven by its hygiene and cleaning products.
• While these stocks may offer more stability and protection during downturns, they may not experience the same rapid growth as companies in more volatile sectors.

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Exhibit 4 summarizes the number of constituents that have increased their dividends in five-year increments. Approximately 30% of constituents have raised their dividends for 20 to 24 years, while 39% have done so for 25 to 44 years or longer. These track records illustrate these companies’ historically consistent ability and willingness to return increasing amounts of capital over multiple decades. Congress spread enforcement responsibility for these laws among a large set of federal and state limefx government agencies, including state law enforcement and regulators. These guidance documents reflect the considered judgment, reasoning, knowledge, and expertise of the CFPB. Say you invested 50% of your portfolio in financial services, 20% in household consumables and 30% in the automobile sector.