It took the S&P 500 only six trading sessions to slip into the correction territory on Feb 27. Per Deutsche Bank, the broader index saw its fasting 10% decline from an all-time high. The rate at which the index declined over the past week surpassed the Black Monday plunge of October 1987.
The Dow, in the meantime, lost nearly 1,200 points and closed in the correction territory. The 30-stock index suffered its biggest one-day point drop ever. The Nasdaq Composite joined the blue chips in the correction territory. Major benchmarks, by the way, are now on pace for their worst weekly decline since the financial crisis as investors continue to pull money out of risker assets, including equities.
Anxiety about the coronavirus spreading across the globe sent stocks spiraling down and has compelled several well-known companies like Apple, Nike, United Airlines and Mastercard to issue earnings and revenue warnings.
Goldman Sachs chief global equity strategist, Peter Oppenheimer, added that “in the nearer term…we believe the greater risk is that the impact of the coronavirus on earnings may well be underestimated in current stock prices, suggesting that the risks of a correction are high.”
News about the deadly virus infecting people continues to rise even as countries take stringent measures to contain the contagion. World Health Organization believes that the outbreak has the potential to become a pandemic.
California Governor Gavin Newsom recently said that the state is monitoring almost 8,400 people for coronavirus. Germany’s health minister in the meantime announced the “beginning of an epidemic” for the country. This follows the rapid spread of the virus in countries beyond China, including Italy, South Korea and Iran.
It’s worth pointing out that the virus has now crippled manufacturing in China, the world’s second-largest economy, and that should certainly have a rippling effect. But it’s not just the coronavirus outbreak that’s pulling markets down. Lofty valuations and the 2020 election have also raised concerns.
Let’s admit that investors were extremely bullish for a couple of months now, leading to the overvaluation of many stocks. So, when conditions were ripe for a pullback, stocks tanked. By the way, Berkshire Hathaway CEO Warren Buffett, one of the biggest role models for investors, filed the latest 13F for the fourth quarter on Feb 14. However, the findings aren’t encouraging. This is because with regard to valuations of businesses, Buffett has shown decent long-term prospects instead of the previous sky-high expectations — a tell-tale sign that stock valuations are stretched at the moment. And how can we forget that the United States for most part of this year will face political uncertainty due to the upcoming election, eventually leading to gyrations in the stock market.
As markets seem to be plagued with widespread uncertainty, defensive stocks seem to be the safest investment option. Such stocks are generally non-cyclical, or companies whose business performance and sales are not highly correlated with the activities in the larger market. Their products are in constant demand irrespective of market volatility and such names include companies from the utilities and consumer staples sectors.
Utilities are deemed defensive stocks as electricity, gas and water are essentials. Food, beverage and tobacco companies are true defensive plays as demand for such staple stocks remains unaltered during market gyrations.
We have, thus, selected five solid stocks from the aforementioned defensive sectors that boast a Zacks Rank #1 (Strong Buy) or 2 (Buy). Further, only low-beta stocks from such defensive companies have been selected. After all, low-beta stocks are the ones that are less correlated to the index and thus tend to be less volatile. In this case, a low beta ranges from 0 to 1.