October 27, 2022
It is no secret that the first half of 2022 has been hard, to say the least, for the stock market. Since the end of last year, the Dow Jones is down 9%, the SPY is down 13%, and the Nasdaq 100 is down a staggering 22%. The Dow experienced its longest losing streak since 1923, with 8 consecutive weeks in the red.
The Fed has started to raise interest rates, and many analysts are expecting many more interest rate hikes this year. A Deutsche Bank research strategist, Jim Reid, has recently said that “Not every Fed hiking cycle leads to a recession, but all hiking cycles that invert the yield curve have [historically] led to recessions within one to three years”. With the stock market being so volatile over the past six months, many people are looking at different investing strategies.
The strategies used during the pandemic were considered “risk-on” strategies, and now with the current market sentiment, many people are starting to flock to “risk-off” strategies. One such “risk-off” strategy is to start investing in defensive stocks. So, what are defensive stocks, and how can they help you boost your portfolio in 2022?
What are defensive stocks?
We have covered defensive socks in a previous article here, but to sum it up:
A stock that’s defensive in nature tends to do better than others in an overall bearish environment. These stocks tend to be in industries with a slower growth rate, such as consumer staples and healthcare. They generally have low volatility, a low P/E ratio, a high dividend, and a long history of success.
A great example of a defensive stock is Coca Cola ($KO): it has shown over 30 years of dividend hikes, has increased its earnings per share almost every year (except in 2020 due to the pandemic) in any market condition, has a P/E ratio which is under 30, and finally has a high Sharpe ratio.