“Offense wins games, defense wins championships,” was a famous line from legendary football coach Bear Bryant. Having collected six national championships, Bryant understood the importance of protection via good defense.
For investors and financial advisors in 2022, Bryant’s observation rings true. Why? Because defensive industry sectors are doing better against broad stock market indexes. Moreover, defensive sectors are dramatically outperforming their offensive peers.
Since the start of the year, the Consumer Staples Select Sector SPDR ETF (XLP) has gained 3.97%, while the Utilities Select Sector SPDR ETF (XLU) has gained 3.31%. By comparison, the Vanguard S&P 500 ETF (VOO) has declined 9.65% so far this year. The only S&P 500 industry sector performing better than staples and utilities is energy, which has bolted over 40%.
The Consumer Staples SPDR fund holds S&P 500 companies tied to food and drug retailing, beverages, food products, tobacco, household products and personal products like toothpaste. Unlike the travel and entertainment arena, which is susceptible to cuts in discretionary spending, consumer spending for basic necessities tends to remain stable.
Top stocks within the fund include blue chips like Procter & Gamble, Philip Morris International, Coca-Cola and Pepsi.
Utilities are another defensive sector with strong 2022 performance.
The S&P 500 contains 29 utilities, and all of them are held inside the Utilities Select Sector SPDR fund. The top holdings include NextEra Energy, Duke Energy and Southern Company. The rest of the portfolio includes companies that generate, transmit and distribute electricity or natural gas.
While not known as a “growth industry,” the utilities component of the S&P 500 is smaller than that of peers like technology and financials, which may signal potential upside. With just a 2.85% sector weighting inside the S&P 500, utilities are among the tiniest industry group.
Consistent dividends are another attractive feature of utilities. Most businesses and people generally continue to pay their electric, water and gas bills regardless of the economic climate. This leads to stable cash flow for utilities, which in turn translates into steady dividend income.
As a result, the current 30-day SEC yield for the SPDR utilities fund is 2.78%, which is slightly more than double the S&P 500’s 1.61% yield.
The outperformance of defensive sectors and the underperformance of offensive growth-oriented industries like consumer discretionary and technology might also be signs of changing stock investor sentiment. The CNN’s Fear & Greed Index, which is expressed in terms of the emotions that move the market, now reads “fear” as the driving market sentiment, while “greedy” was the emotion that dominated last year.
Fears about a U.S. economic recession are prevailing, too.
With the Federal Reserve poised to fight runaway inflation with aggressive interest rate hikes, some are concerned that it could push the country into a no-growth environment.
In March, respondents to a CNBC Fed Survey saw a 33% chance of recession in the next 12 months. That was up 10 percentage points from the February figure.
While it’s impossible to predict how the broader economy will behave in the near future, the price action of defensive sector ETFs is signaling caution. And for tactically minded investors, the dull but defensive industry groups like staples and utilities are delivering exciting results.