Defensive Stocks proved to be some of the most successful and desirous of 2022—despite consistently low returns.
- The year 2022 was challenging for the stock market, with multiple crashes, bear markets, and stressors forcing investors to choose safe bets against the overall trends.
- Investors turned to low-return investments with solid records of necessity during an economic downturn, avoiding risky investments, The Wall Street Journal reports.
- Utilities, commodities, and healthcare companies had strong years.
- Other sectors saw much more severe downturns, including a 42% loss for communication services and a 39% loss for consumer-discretionary sectors.
Why it’s Important
Even with the market slumps of June and September in the mirror, the market was still down in 2022 from 2021. The Dow Jones Industrial Average was down 8.6%. The Nasdaq Composite Index was down 32.97%. The S&P 500 Index down 19.2%. The economy was severely shaken in 2022, and the Federal Reserve’s interest-rate hikes set the market for a worse downturn in 2023.
Defensive Stocks are a helpful alternative in an economic downtown, as they’re based in industries like healthcare or consumer staples that are always in high demand. The only sector that outperformed them in 2022 was the energy sector—which saw high demand for fossil fuels and significant investment due to the Inflation Reduction Act.
“Shares of utility, consumer staples and healthcare companies have weathered the storm better than most of the market this year. Consolidated Edison Inc., Campbell Soup Co. and Merck & Co. Inc. are among the standouts, each rallying double-digit percentage points in 2022,” says The Wall Street Journal.
“These sectors are often thought of as defensive areas of the market, which means their earnings are somewhat shielded from a slowing economy. The idea is that consumers still pay electricity bills, buy groceries and pick up prescriptions even when times get tough.”
Investors are willing to accept a 2.6% return in exchange for stability, and defensive stocks are heavily sought, to the point that they’re currently overvalued in the S&P 500 consumer-staples sector.
“There’s nothing necessarily fundamentally exciting going on in the defensive areas. They’re just a good place to hide,” says Globalt Investments senior portfolio manager Thomas Martin.