As major U.S. stock indexes tumble from their April highs, not all stocks are being hit equally. While the broad Standard & Poor's 500 index is down 5.6 percent so far in May, many so-called defensive stocks have held steady.
The S&P 500 Consumer Staples index is down just 0.68 percent in May, the best performer of 10 major sectors in the S&P 500. On May 17, shares of consumer staples company Kellogg (K) hit a new 52-week high, trading at their highest price since October 2008.
Investors may be dashing toward safe havens because of recent headlines, like the fiscal crisis in Greece. Or they may be just taking profits after the 80 percent run in the S&P 500 from Mar. 9, 2009, to Apr. 23, 2010. "The market was due for a correction, and Europe was just the excuse," says Mitch Schlesinger, chief investment officer at FBB Capital Partners.
In any case, after the past year's rebound, the economy and stock market may be moving into a new phase, says Jim Meyer, principal and chief investment officer at Tower Bridge Advisors.
In the first phase, "old problems start to fade away," he says. Earnings rebound and stocks bounce back. In the second phase, "the healing process" continues but new problems start to surface—problems like the fiscal woes in Greece and worries about other nations' debt loads, or the prospect of higher inflation or higher interest rates.
An increase in volatility in the stock market shows investors are concerned. The Chicago Board Options Exchange Volatility Index, or VIX, is up 82 percent in the past month. For investors, defensive stocks—often steady, almost boring in their price action—are one way to avoid that kind of stomach-churning stress.
But where to find these refuges among equities?
A traditional defensive sector is utilities, but not everyone is a fan. There is a "question mark" over the sector because of worries about regulation and high raw material costs, says Oliver Pursche, co-portfolio manager of the GMG Defensive Beta Fund (MPDAX). In May, the S&P 500 Utilities index is down 2.7 percent, the third-best performer after consumer staples and telecom.
Pursche prefers consumer staples stocks like PepsiCo (PEP) and CVS Caremark (CVS), both of which he owns.
Consumer staples companies tend to have more stable business models because they sell products people need to buy—a contrast to the more elective products offered by the consumer discretionary sector.
If you're concerned about your job, "you're going to put off buying a new couch or bedroom set," Pursche says. "You're not going to put off buying shampoo or Band-Aids."
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