Tuesday’s warning of credit challenges from Ally Financial may be the latest sign that the U.S. economy is edging closer to a recession, but that doesn’t mean it’s time to rush into traditional defensive stocks. Lauren Goodwin, chief economist and market strategist at New York Life Investments, told CNBC that winning stocks are unlikely to fit into defensive sectors at this point in the economic cycle. “If you’re worried about growth, quality stocks are really your play and can be spread across a lot of sectors. Sectors will go up and down and win and lose as we get closer to a recession, but until jobless claims pick up significantly or earnings growth doesn’t do well, I don’t see sectors being a consistent play,” Goodwin said. When Wall Street pros refer to “defensive stocks,” they typically point to the types of companies that have seen their sales recover better during economic downturns, such as utilities and hospitals. “Quality” is an investing factor that focuses on measures of a company’s financial strength, and these stocks can theoretically be found in any industry. Goodwin also said the election cycle could create some volatility in the sector between now and November as investors try to gauge how different outcomes might change policy in the years ahead. Another thing investors should consider is that some traditionally defensive sectors have seen gains. The Utilities Select Sector SPDR Fund (XLU) rose 13% in the third quarter, likely fueled by expected energy demand from artificial intelligence. Meanwhile, the Consumer Select Sector SPDR Fund (XLP) has gained 9% and the Health Care Select Sector SPDR Fund (XLV) has gained more than 6%. XLU mountain 2024-07-01 Defensive stocks like consumer staples have performed well in the third quarter. Instead of rotating into defensive stocks, Goodwin said, investors should focus on finding ways to lock in higher yields in fixed income before the Federal Reserve starts cutting interest rates.
