Defensive Stocks

Certain stocks appear to remain relatively stable regardless of the state of the economy in general. These are typically referred to as defensive stocks, and they represent companies that offer individuals the products or services that they require so that they can function in their daily lives. As such, people will continue to require the products from these companies even if the economy is undergoing periods of uncertainty.

Companies like Walmart and Procter & Gamble, for instance, are not entirely separate from the economy, but are mostly impacted by the consideration of how necessary these products are to consumers. While the purchasing power of consumers may decline during tough economic times, they will not significantly reduce their spending with these companies. Other sectors that fall into this category include utilities, healthcare, and consumer staples, as these are areas where individuals have little choice but to continue spending regardless of broader economic conditions.

Similar to these companies are those that produce goods and provide services like groceries. While consumers may avoid purchasing items from luxury companies or skipping purchases in general, they cannot avoid the need for food. Therefore, issues like supply chain disruptions or weather events affecting crop yields would have a major impact on the company and its stocks, but they would be far less impacted by issues like the computer chip war between the US and China.

It is worth noting, however, that defensive stocks come with a tradeoff. Because they are shielded from the worst of economic downturns, they also tend to grow more slowly during periods of strong economic expansion. Investors seeking large gains in a bull market may find that defensive stocks underperform compared to growth-oriented sectors like technology or consumer discretionary. This makes them less of a path to outsized returns and more of a stabilizing force within a broader portfolio.

Because of this, these stocks are considered to be appealing to many investors, particularly those approaching retirement or those who prioritize capital preservation. As a result, it can be a sound strategy for investors to place a portion of their portfolio into these types of stocks as a means of reducing their overall risk, while still maintaining exposure to higher-growth opportunities elsewhere.