Don’t Buy Expensive Just Because It's Defensive

Schwab Sector Views is our three- to six-month outlook for 11 stock sectors, which represent broad sectors of the economy. It is designed for investors looking for tactical ideas. We typically update our views every two weeks.

It's back! Just as recession worries seemed to be fading after the flare-up in August, investors are once again alarmed at the prospect, amid a barrage of weak data both in the U.S. and around the globe. We recently penned that we're on watch for a recession, given our belief that we're late in the business cycle. We certainly are seeing some signs of that in the markets, with some of the traditionally defensive sectors keeping up with—or even outpacing—some of the more cyclical sectors over the past year. But as the title of this piece implies, some of the classic defensive sectors currently come at a dear price.

What makes a sector defensive?

When we talk about defensive sectors, we're typically focused on the traditional stalwarts: Utilities, Consumer Staples and Health Care.

  • Utilities include heavily regulated gas and electric industries with relatively steady revenues and earnings. In a sense, they are monopolies that can withstand the ebbs and flows of the economy. Even if demand for energy were to decline enough to affect revenues, the companies can petition governing bodies for rate increases.
  • Consumer Staples comprise the companies that produce the goods and provide the services that most people won't do without even in a recession. Food and personal items are obviously at the top of the list of necessities, but the group also includes alcohol and less-expensive items that are inconsequential to the budget, like soda.