Coca-Cola. Photo: depositphotos
Interest in defense sectors is growing
Against the backdrop of heightened fears about a possible slowdown in the US economy, investors are turning their attention to defensive sectors of the market. In particular, shares of such companies as Coca-Cola and Colgate-Palmolive are being actively bought. According to Economic Truth, this is part of a broader trend of investing in consumer goods, as these companies are considered more resilient in the face of economic instability.
The consumer staples sector, which also includes companies such as Kraft Heinz, Procter & Gamble and Walmart, has outperformed the blue-chip S&P 500 for six of the past eight weeks. Last week, the sector posted its best relative performance since the pandemic began, according to Bloomberg in March 2020.
Growth of the index of consumer goods against the background of economic uncertainty
The increased demand for shares of consumer goods companies reflects an extension of the current market rally, which was previously focused mainly on large technology companies. The S&P 500 consumer staples index hit record highs, although it was slightly lower in recent days.
The sector’s growth comes amid the first signs of trouble in the US labor market, fueling debate over how aggressively the Federal Reserve should cut interest rates. There are fears that the world’s largest economy could face a recession in the coming months.
Analysts predict further growth of defense sectors
Jim Paulsen, former chief strategist of The Leuthold Group, noted: “A recession will clearly lead to growth in defensive sectors. Instead, strong economic growth will cause them to fall behind.” According to analysts, investors view companies such as Coca-Cola and Colgate as a safe bet during periods of uncertainty.
Coca-Cola shares are up about 20% this year, and Colgate-Palmolive shares are up 33%. Shares of retailers Walmart and Target are up 14.8% and 9.1%, respectively, over the past month, while shares of household goods maker Clorox are up 15.6%. All of these numbers far outpaced the S&P 500’s gains, which rose just 4.5% during that period.
Historical Resilience of Defensive Sectors During Economic Slowdowns
Irene Tunkel, chief U.S. equity strategist at BCA Research, noted: “Historically, consumer staples have performed well ahead of the Fed’s first rate cut, which usually comes amid ample evidence of a slowing economy.”
At the same time, Tunkel warned that “if suddenly there are data that contradict the forecasts of a hard landing of the economy, and optimism returns to the market, then consumer goods will begin to lag behind.”
Last week, Morgan Stanley added Walmart, Coca-Cola and Colgate to its list of recommended stocks. The bank advises clients to focus on “defensive companies that are actively improving operational efficiency or have stable price positions.”
