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Defensives, energy, dividend plays gain favor as market swoons anew

By Lewis Krauskopf

NY (Reuters) Fresh volatility in U.S. stocks is pushing some investors to hunker down in regions of the market which have been relatively strong throughout a brutal year for equities, including energy shares, defensive names and dividend-payers.

The S&P 500 is down 9% since mid-August, partially reversing a summer rebound after Federal Reserve Chairman Jerome Powell warned the central banks single-minded fight inflation may lead to economic pain.

While few sectors of the marketplace have already been spared through the indexs nearly 18% selloff this season, some have fared comparatively better, a dynamic investors hope will blunt further losses within their portfolios if asset prices remain volatile.

Sectors such as for example consumer staples, healthcare and utilities have fallen less steeply compared to the broader S&P 500 over summer and winter. Investors have a tendency to gravitate toward companies in these areas during uncertain times, expecting consumers to keep shelling out for medicine, food along with other necessities despite economic turmoil.

The power sector remains one of the primary winners of 2022 with a 44% gain year-to-date, despite a recently available pullback.

Simultaneously, the S&P 500 dividend aristocrats index, which tracks companies which have increased dividends annually for days gone by 25 years, has fallen about 10% this season, a less severe drop compared to the overall markets decline.

Those kind of steady-Eddie names could tread water in a downward sloping market, said Chad Morganlander, portfolio manager at Washington Crossing Advisors, who manages a technique involving companies he expects to improve dividends in the months ahead, including Johnson & Johnson and Clorox Co.

The S&P 500 ended the week with a lack of 3.3%. The index fell 1.1% on Friday after early gains from the U.S. jobs report that showed a labor market which may be needs to loosen gave solution to worries concerning the European gas crisis.

The rally which has powered stocks through the majority of the summer has had a large hit, with the S&P 500 now up about 7% from its mid-June trough. If the index again make fresh lows this season, it might be the fourth time stocks gained at the very least 6% before retreating and marking a fresh bottom for 2022.

A swift rebound in bond yields has further complicated the outlook for equities, putting technology along with other growth stocks which are more sensitive to rising yields under particular pressure.

The pullback in equities and the rise in yields come in line with this view that investors had underestimated the willingness of central banks to tighten policy at current rates of inflation, UBS Global Wealth Management wrote this week.

The firm recommends tilting portfolios toward defensives, including pharmaceutical shares, and so-called quality companies whose attributes include higher-than-average dividend yields and low debt-to-equity.

Worries that the Fed will battle to tamp down inflation which surged at its highest pace in a lot more than four decades this season have already been another catalyst for investors to diversify. A growth around 20% in Brent crude has helped make energy shares a specific favorite this season, while also putting upward pressure on consumer prices.

I’m not convinced equity investors have the entire appreciation for the impact of inflation on the portfolios, said John Lynch, chief investment officer at Comerica Wealth Management, citing the fallout for the economy from higher rates and the erosion of income from higher costs.

He’s got in recent weeks bought more shares of energy companies, betting supplying constraints will continue buoying oil prices. Lynch in addition has found shares in the healthcare sector, which he believes is more affordable than other defensive regions of the marketplace.

Needless to say, areas which have outperformed this season come with their very own risks. Energy prices have already been volatile and may slide should a recession crimp global demand, pressuring energy stocks.

Some defensive areas, specifically the utilities and staples sectors, are trading at significantly higher price-to-earnings valuations than their historic averages. Investors may possibly also abandon defensive plays if the economy avoids a downturn.

Horizon Investment Services owns shares of utilities companies but weren’t just all on defense, said Chuck Carlson, the firms ceo.

Some of these areas are pretty expensive, Carlson said. Youre paying up for that defense.

(Reporting by Lewis Krauskopf in NY; Editing by Ira Iosebashvili and Matthew Lewis)

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