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Will Defensive Sectors Shine in the Extremely Volatile 2022?

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Wall Street has witnessed a tough 2022 so far after an astonishing rally in the pandemic-ridden last two years. The economic pain of coronavirus has been felt for the first time this year as the U.S. government has stopped its fiscal stimulus and the Fed turned ultra-hawkish from ultra-dovish in its monetary policies.

The complete devastation of the global supply-chain system, 40-year high inflation, sky-high commodity prices and food inflation thanks to a prolonged war between Russia and Ukraine and a tougher-than-expected Fed with a harsher rate hike to cool inflation have significantly dented market participants’ confidence in risky assets like equities.

A series of weak economic data and some bad news from corporate America have heightened investors’ concerns of an impending recession. Wall Street is falling precipitously in the absence of a trigger to rebound.

An Ultra-Hawkish Fed   

The Fed has already hiked the benchmark lending rate by 75 basis points and given a clear indication of two more rate hikes of 50 basis points each in June and July. The central bank terminated the $120 billion monthly quantitative easing program in March and will start shrinking its $9 trillion balance sheet from June.

Market participants expect the Fed to take a harsher strategy to combat inflation. On May 12, Fed Chair Jerome Powell admitted that he cannot give any guarantee for a soft landing of the economy under a higher interest rate regime. Several economists are expecting the Fed fund rate to exceed 2% by the end of 2022.

Big Retailers Raise Alarm Bell

In the last couple of weeks, several big U.S. retailers missed earnings estimates and issued a disappointing guidance. Mounting inflation has resulted in an unexpected rise in logistics and labor costs. Moreover, a section of Americans is shifting expenditure from discretionary items to necessary goods, especially groceries.  

The Fed has decided to aggressively hike the interest rate. This will raise the cost of borrowing for businesses. Higher prices of final products will reduce the aggregate demand, the major growth driver of the U.S. economy.

Snap Sends Shock Wave on Digital Advertising

On May 23, after the closing bell, Snap Inc.’s (SNAP) CEO Evan Spiegel warned in a note to employees that the social media company will miss its targets for revenues and adjusted earnings in second-quarter 2022. Spiegel said “the macro environment has deteriorated further and faster than we anticipated when we issued our quarterly guidance last month.”

Spiegel’s warning sends a shock wave across Wall Street. Most of the stock analysts and financial researchers believe that this is not an isolated phenomenon for the company. The companies that depend most on digital advertising revenues are likely to suffer going forward.

Accordingly, shares of social media giants Meta Platforms Inc. (FB), Alphabet Inc. (GOOGL) and Twitter Inc. (TWTR)  have tumbled 7.6%, 5% and 5.6%, respectively. Snap’s warning is considered by several economists that the U.S. economy is slowing down.

Why Defensive Stocks

Markets are likely to remain volatile as investors are waiting for back-to-back crucial FOMC meetings in June and July. Defensive sectors like consumer staples, utilities and health care should provide stability to one’s portfolio. In the past three months, out of the 11 broad sectors of the S&P 500 Index, the Utilities and Heal Care gained 13% and 3.3%, respectively, and the Consumer Staples fell marginally by 0.3%.

Defensive sectors are mature and fundamentally strong as demand for such services is generally immune to the changes in the economic cycle. These sectors include companies that provide necessities and products for daily use. Therefore, these sectors have always been a go-to place for investors, who want to play it safe during extreme market fluctuations irrespective of internal or external disturbances.

At this stage, it should be a prudent move to invest in stocks from defensive sector with a favorable Zacks Rank. Several such stocks are available, from which we have selected five.  These stocks have strong potential for the rest of 2022 and have seen positive estimate revisions in the last 30 days.

These are — Global Water Resources Inc. (GWRS - Free Report) , Vistra Corp. (VST - Free Report) , Archer-Daniels-Midland Co. (ADM - Free Report) , Pilgrim's Pride Corp. (PPC - Free Report) and AMN Healthcare Services Inc. (AMN - Free Report) . Each of our picks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past three months.

Zacks Investment Research
Image Source: Zacks Investment Research