Written by: Nikki-Lee Birdsey
The 10-year-long bull market is set to continue through early 2020, but it will be subject to rising political and economic policy uncertainty from major financial centers in the United States, China, and the United Kingdom. Goldman Sachs’ 2020 U.S. Equity Outlook, released in November, had a base prediction that the S&P 500 will rise to 3400 through the end of 2020, but all of this is heavily contingent upon US election outcomes.An alternative perspective is that trade tensions between China and the US, combined with uncertain oil prices, have market participants concerned that a global economic slowdown is in the near future.
Time to Go Defensive?
While economists aren’t forecasting a recession yet, investors might want to increase the weight of defensive stocks in their profiles. In a mid-year report Mike Wilson, Chief U.S. equity strategist at Morgan Stanley, said of the bull market, “We’re moving from the perception that this is late-cycle to a belief that it’s end of cycle.”Wilson continued, “In the past year, defensive stocks and bonds have been the place to be, not growth stocks, particularly on a risk-adjusted basis. While growth stocks resumed their leadership during the first half of the year, they relinquished it again in mid-July, which is when the positive correlation between bonds and stocks reversed.”Defensive stocks such as utilities, consumer staples, and real estate have been outperforming growth stocks in the second half of the year. Ball Corp (NYSE: BLL ):
90% of its earnings is from aluminum beverage packaging, and consumers are turning away from plastic. What’s more, this company’s costs are tied to prices of raw materials such as aluminum. If a recession hits, a decrease in demand for raw materials results in low costs that would compensate for any losses. This happened with Ball Corp in 2009 during the Great Financial Crisis, and current CEO John Hayes forecasts long-term growth.With a 10-year streak of paying dividends without interruptions, Ball Corp is a safe bet, and also has a market capitalization of over $30 billion. Broadcom (NASDAQ: AVGO ):
With quarterly revenue above average, Broadcom’s current 3.3% yield has signaled it has recovered well from the 2011 recession. It also has a 2,100% dividend growth over an eight-year timeframe. Further, the ongoing launch of 5G wireless networks bode well for Broadcom’s manufacturing of wireless chips for smartphones and broadband access chips. PepsiCo Inc. (NASDAQ: PEP ):
A classic consumer staples stock in the S&P 500 with one of the lowest 12-month trailing Price to Earning (P/E) ratios. Because profits can be returned to shareholders in dividends or buybacks, a low P/E ratio means investors are paying less for profit generated. As of December 9, PepsiCo Inc. has a price of $134.57, a market cap of $187.7 billion and a 12-month trailing P/E ratio of 13.2.