Tuesday, May 7, 2013

The Rise of the Defensives

One common way to subdivide the stock market is to put all companies into two broad categories: cyclicals and defensive stocks. Cyclicals fall into sectors like high-tech or consumer discretionary stocks, things that people tend to buy more of when the economy is doing well. Defensive stocks are less tied to the strength of the economy, things that people still buy regardless of macroeconomic factors, like health care or consumer staples.

In the current market, defensive stocks like Procter & Gamble and Johnson & Johnson are far outpacing the cyclical stocks. According to data compiled by Bloomberg News, defensive stocks are up 19 percent on average so far in 2013, which is their best start to a year since 1991. The current difference between the two categories is the widest it's been since August 2011.

And there may be some future significance to that indicator. According to research from JP Morgan, when defensive stocks have significantly outperformed in recent years, the S&P 500 has posted gains over the next quarter eight out of ten times.

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