The stock market's head fakes can feel dizzying these days. Stocks climb one day only to tumble the next. Blink and you miss a 3% move. Indeed, had you tuned out the financial press in August, you'd have opened the papers to learn that the U.S. stock market had experienced its first correction (a decline of 10% to 20%) since 2011.
Now, with Standard & Poor's 500-stock index down 8.6% since peaking in July, many investors are asking whether it's time to dump stocks and load up on cash. We'd argue against such drastic measures. But it may make sense to play a bit of defense--especially if you might need to pull money out of the stock market in the next year or two.
For starters, it's getting harder for stocks to overcome some tall hurdles. Among the biggies are a potential interest rate hike by the Federal Reserve, a slowdown in China's economy, and a strong U.S. dollar, which is putting pressure on the profitability of U.S. companies that do a lot of business abroad. Independently, none of these things would be enough to throw the market off-kilter; combined, they make for a powerful headwind.
A handful of stocks, meanwhile, have been doing much of the market's heavy lifting. If it weren't for relatively strong showings by tech darlings such as
Bulls, of course, argue that fears of a downturn are overblown and that stocks will resume their upward march. The U.S. economy expanded at an annualized rate of 3.7% in the second quarter--faster than any major developed country. Strong economic performance doesn't preclude the onset of a bear market (a decline of at least 20% from a previous peak), but makes one less likely in the near term. Kiplinger expects real gross domestic product to expand by 2.5% for all of 2015 and by 2.8% in 2016.
Stocks look cheaper as well, with the S&P 500 trading for a bit more than 15 times estimated earnings for the next 12 months. That's below the market's 20-year average P/E of 16.4, according to UBS, which says stocks look "undervalued."
Yet stocks aren't really cheap if analysts start to ratchet down their earnings estimates. Many companies have in fact been slashing their projections for third-quarter earnings; out of 106 S&P 500 businesses that have issued forecasts, 76 have reduced estimates, according to FactSet. Overall,
With so many crosswinds buffeting the market, it may be a good time to get defensive. We don't advise jumping out of stocks, because you'll be hard-pressed to know when to jump back in for the recovery. But some sectors and stocks tend to be more resilient in turbulent times, offering a bit more protection than others.
Two sectors that look compelling now: health care and companies involved in consumer necessities. Both tend to be relatively strong in periods of rising interest rates, says Stack, and they should hold up better if stocks take another turn for the worse. He advises putting 13% of your stock assets in consumer staples and 16% in health care.
Exchange-traded funds that track market indexes can get the job done. The
Buffett has also been dipping into the energy patch, building a
Oil-and-gas giant
Utilities and pipeline companies that distribute natural gas look attractive as well. These are "toll-taker" businesses that benefit from low and stable gas prices, says
Granted, utilities and pipeline stocks could slump if interest rates spike. Higher rates increase financing costs for these companies, which have heavy debt loads, and the stocks could slide if investors dump them for bonds or other income investments. Still, natural gas production is rising, along with demand for the fuel source. As long as gas stays cheap and plentiful, Kelley says, "these companies will chug along just fine."
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Daren Fonda is an associate editor at Kiplinger.