In the stock market, defence has been the best form of attack this year, says Alexandra Scaggs in The Wall Street Journal. Rallies are usually led by cyclical, or economically sensitive, companies. But the best performers in America’s S&P 500 have been the healthcare and consumer-staples sectors: defensive industries, where companies tend to make money in good and bad times, and pay a dividend.
Defensives have been strong for some time now, notes James Mackintosh in the FT. The highest-yielding quartile of the S&P is on a forward price/earnings (p/e) ratio of 16, the highest figure in data going back 20 years.
In Britain, food and drinks groups are on cyclical p/e ratios of over 25. Some investors are sceptical of the rally and are sticking to safer stocks. But the main reason for the trend is the search for income amid low interest rates, says Mackintosh.
What now? Defensives could stay expensive for a long time as they look relatively solid whatever the backdrop. As John Stepek points out in our free daily investment email Money Morning, they tend to fall less than riskier stocks when markets slump.
If growth weakens, all stocks would falter, interest rates would stay low and income stocks would remain attractive. If growth improves, it would also eventually benefit slower-growing blue-chips, while the prospect of higher interest rates would be worse for riskier firms. If things stay as they are – tepid growth and ongoing money printing – income-bearing quality stocks should keep climbing. There’s no need to sell yet.