We had a SlingShot Trader member ask, “I hear the term ‘defensive sectors or stocks.’ Does this mean these are related to the Department of Defense?”
Very good question. No, defense stocks like Lockheed Martin (NYSE:LMT) that are Defense Department related are not necessarily defensive stocks. Classically, we would say defensive stocks are healthcare stocks, consumer staples – so companies like Altria (NYSE:MO) and Philip Morris (NYSE:PM) – and utilities would fall into that category.
A lot of them pay dividends. On average, they pay a much higher dividend than growth sectors do. So, for those reasons, they tend to suffer less in economic downturns. You may not buy your flat-screen TV, but how many people stop smoking in an economic downturn or stop going to the doctor? Some will, but far fewer will do that.
In addition to that, during times of uncertainty, traders like income so they go to the sectors that happen to pay, on average, higher dividends, so they like to accumulate within those sectors during a time of uncertainty. That’s why during the later stages of a bull rally like we had recently defensive sectors have actually out-performed groups like energy, manufacturing, technology and so forth. That’s what we mean by defensive.
Be sure to check out a recent Trade of the Day to show why “defensive” doesn’t mean pullbacks don’t occur.
Investor Place advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.