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After a difficult 2015 – a year in which the Dow Jones Industrial Average and S&P 500 Index posted declines – it was widely hoped that 2016 would get off to a better start. Investors hoped that a “Santa Claus rally” would spur gains for stocks. Unfortunately, that did not happen.
The stock market continued to fall in early January. The S&P 500 Index declined approximately 6% in the first full week of trading, amounting to the worst start to a market year in four years. Not surprisingly, the bloodletting continued in energy, but the carnage spilled over into other market sectors as well.
Here is a rundown of everything that is causing investors to panic right now, plus a few defensive stocks that can help.
Market Sell-Off is the Sum of All Fears
Among the hardest-hit stocks last week were energy and materials stocks, as well as technology stocks. The key concerns for investors that caused the stock market declines were falling energy prices, and escalating fears of an economic slowdown in China.
First and foremost, commodity prices continue to collapse. West Texas Intermediate crude, the key benchmark in the United States, and Brent crude, the international benchmark, currently sit below $40 per barrel. In the United States, crude is at levels not seen in the past 12 years. This has caused profitability, and by extension stock prices, to collapse across the energy sector.
In addition to the energy woes, investors are increasingly concerned about economic conditions in China, a key emerging market. Economists have been reducing estimates for economic growth in China, with many now suggesting the nation could see 6% growth in gross domestic product this year.
Investors Rush for the Exits
The end result of all this is that investor sentiment has clearly deteriorated. According to mutual fund monitoring service Lipper, investors withdrew more than $12 billion from equity funds in the first full trading week in January.
It was initially thought that the damage from energy prices and worries over China could be contained to a few unfortunate sectors, but the pervasive fear is quickly spreading. Even highly profitable stocks with strong business models and high-quality brands are selling off. In fact, after just the first five trading days of the year, more than 40 stocks in the S&P 500 had already lost at least 10%.
Even companies that stand to benefit from lower oil prices are being sold. Stocks in the airline, auto, and retail industries, three of the biggest beneficiaries of lower oil prices, are falling right alongside the broader market. In this market, there truly is no place to hide.
As a result, energy, materials, industrials and technology stocks look vulnerable to continued selling pressure. But the good news is is this: stocks that have nothing to do with oil and the U.S. dollar are the types of companies that may do well and continue to outperform.
Defensive Stocks With Dividends
In this environment, investors should focus on defensive stocks – issues that have nothing to do with oil or the strengthening U.S. dollar, the two biggest headwinds for 2016. In particular, tobacco giant Altria Group (NYSE: MO) and utility giant Consolidated Edison (NYSE: ED) are defensive stocks, in that they operate businesses that are recession-resistant. Altria and ConEd are up 15% and 1%, respectively, in the past 12 months, not including dividends.
People tend to buy cigarettes, even when the economy takes a downturn. And, of course, everyone needs to keep the lights on. That means Altria’s and ConEd’s profitability remains intact, even in recession. Plus, these defensive stocks reward their shareholders with compelling 4% dividends, which are very attractive in a low interest rate market.
The bottom line is that the stock market decline has a lot of investors on edge. If the thought of further declines is more than you can stomach, it may be time to turn to defensive stocks. Altria and ConEd operate entirely in the U.S., meaning they are immune to the rising U.S. dollar, and they have nothing to do with oil.
Worry-Free Riches
They’re owned by some of the wealthiest people on the planet. They share a few key similarities that distinguish them from 99% of equities. Even as the S&P keeps breaking record highs, they’re still crushing it. In fact, over the last ten years they’ve outpaced it by a colossal 390%.