The 3 Best Sectors for a Bear Market

This has not been a kind year for investors. In fact, the S&P 500 fell 21% in the first half of the year. Further, on June 13 the index officially fell into bear-market territory as it closed 20% below the highs it reached in January. That means investors should logically seek to buy stocks that are in the best sectors for a bear market. 

The current bear market has caused investors to rethink their strategies. Moreover, successive bouts of quantitative tightening have raised interest rates, changing the entire market landscape. Companies that were able to survive  and in some cases even thrive despite their suspect fundamentals have seen the rug pulled out from underneath them. Meanwhile, previously high-flying growth stocks have suddenly had to deal with a sea change in which they have abruptly begun to be considered overvalued and their prices have plummeted. 

That’s what bear markets do. They also cause investors to seek out new stock sectors that looked relatively unappealing during bull markets. In order to understand which stock classes should perform best going forward, investors should look to the past. Fortunately, today’s investors have a wealth of resources at their fingertips. 

Consumer Staples Stocks 

A 2018 chart from Capital Group clearly shows that the three best performing sectors during the previous, seven, major stock-market retreats were  consumer staples, utilities, and healthcare stocks. 

Let’s begin with consumer staples, which outperformed the S&P 500 during all seven of the retreats. 

The data doesn’t lie: Consumer staples are a rock-solid choice for investors who are currently looking to readjust their portfolios.

If you think about it, the reason that consumer staples perform well during bear markets and recessions is very logical. Specifically, staple goods are considered necessary and include items like wheat, sugar, rice, bread, cereal, and milk. 

These items are among the very last to be affected by decreases in demand. The non-cyclical nature of stocks like Bunge (NYSE:BG), Tyson Foods (NYSE:TSN), and Albertsons (NYSE:ACI) means that they have a very good chance of outperforming during the current bear market as well. 

Healthcare Stocks 

Healthcare is another sector that has historically fared much better when the economy is weak. As with consumer staples, the explanation lies in the fact that the demand for healthcare remains relatively steady during economic downturns. 

Not only do healthcare companies sell goods and services that generate steady demand,  but they also tend to pay dividends. 

The oft-cited notion that classically defensive stock sectors are the way to go remains as popular as ever. Respected leaders, including New York Life Investments portfolio strategist Lauren Goodwin and PGIM Quantitative Solutions Co-Head Edward Campbell echo the sentiment that healthcare stocks are a wise choice in the current environment. 

Investors would do well to consider Johnson & Johnson (NYSE:JNJ) or Baxter International (NYSE:BAX) and other similar, high-quality healthcare stocks. 

Meanwhile, mergers and acquisitions are clearly hot in the healthcare sector. Large healthcare firms are likely to continue to seek valuable additions. Those flush with resources will be able to find deals as the weak economy creates new opportunities across the sector. 

That means already strong healthcare firms could pick up underpriced companies, enabling them to really supercharge their value. 

Bonds

Investors should also consider that an overall weak stock market may not be the best choice overall. So while it makes sense to pivot into consumer staples, healthcare, utilities, and telecoms, it’s also worthwhile to consider other asset classes. 

Government bonds are a great example. Generally speaking, bonds have an inverse relationship to the stock market. In other words, when markets are weak, bonds tend to be strong. 

There are caveats to that rule of thumb, but when investors expect a recession, bond prices generally rise as stock prices move lower. 

Nuveen recently implied that municipal bonds look like a particularly good choice at the moment. 

The expectation of further rate hikes is highly likely to keep the bond market strong throughout this year. 

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.