Defensive stocks can save your funds from recession

The risk of another recession is increasing with each passing day. But, instead of just worrying about it, there are a couple of things you can do to protect your investments and even take advantage of some new opportunities. Read on to learn more!


by Aline Barbosa

06/03/2022 | Updated on 06/04/2022

Wall Street experts offer their advice on what to do should things take a turn for the worse.

defensive stocks
Defensive stocks are a solid investment choice right now. Source: Adobe Stock.

For the last couple of months, the talk of a recession has been keeping financial analysts up at night. Wall Street veterans are constantly flagging the risks of a stock market downturn. Now, they’re offering advice on how investors should prepare their portfolios to weather the storm. And defensive stocks are in. 

In its May report, the investment firm Morgan Stanley noted that the risk of a recession has gone up materially. With the increasing number of shocks currently hitting the economy, the country could tip over a recession within the next 12 months. One of the factors mentioned in the report is the war in Ukraine – which could push oil prices to $150 a barrel. The crushing cost pressure on companies and the strong dollar were also cited. 

Ed Yardeni, a Wall Street veteran, said in April that there was about a 30% chance of a recession hitting the U.S. With the events that unfolded last week, he raised that percentage to 40%. Jane Fraser, Citi’s CEO, said in an interview that she is sure that Europe is well on its way to a recession as well. 

The conflict in Ukraine has impacted the global economy and caused energy and food prices to rise significantly. Both the U.S. and the U.K., along with many other countries, are struggling with inflation that has increased to a decades high. 

Stock indexes have declined sharply since their peak in the last quarter of 2021 and January 2022. Nasdaq lost about 23% since the beginning of this year, and the S&P 500 dropped 13% as well. So how can investors ride out the ongoing turbulence that’s happening in the stock market? See below what financial experts have to say on the matter.

Invest in these three specific defensive stocks

defensive stocks
Keep these sectors on your watchlist. Source: Adobe Stock.

Since the stock market volatility isn’t going away anytime soon, Morgan Stanley said investors should consider defensive sectors to invest in. In its May report on its American market outlook, shares of health care, real estate and utilities are recommended. 

With the Energy sector notwithstanding, all other top performing segments have come from more defensive ends of the spectrum. Morgan Stanley said it doesn’t believe defensive stocks will outperform in the next quarter. However, they should provide some protection for investors.

That is because defensive stocks provide stability in the form of dividends and earnings, regardless of how the stock market is. Other stocks, called “cyclicals” suffer the effects of economic cycles. 

  • Health care defensive stocks: According to Morgan Stanley, unlike most sectors, the health care segment is trading at a discount. The company recommends large-caps stocks in biotech and pharmaceuticals. They are currently trading at an interesting price with dividend yields that are sure to attract investors. 
  • Real estate defensive stocks: The sector outperformed the U.S. market by 16% in 2021, gaining 42% over the year. Morgan Stanley recommends this segment due to its earnings stability and continued dividend income. The company believes that the REITs ongoing cash flow should offer defensive exposure against the market’s volatility in the upcoming years. 
  • Utilities defensive stocks: Although valuations are already high, Morgan Stanley remains optimistic about this particular sector. That’s more to do with its downside protection that a probability of an upside. 

Have patience

The Wells Fargo Investment Institute doesn’t measure words when talking about recession. According to them, it requires extra patience from investors before taking part in any investment opportunity. Even when it comes to defensive stocks.

Wells Fargo’s senior global market strategists say that investors should take a step back when it comes to reinvestments. That is because bear markets can last for a while, and sometimes create drawdowns of about 30%. 


Invest in grade A bonds

This should come as a given, but it’s important to invest in quality bonds. Financial strategists say this is the time to stay away from high-yield bonds altogether. As markets dive deeper into a late cycle, Morgan Stanley states that it’s important to choose quality over junk. Quality bonds have been outperforming since November of last year, then the hawkish Fed shift started. 

Not only that, but the alluring income offered by defensive stocks will most likely offset the impact of widening spreads should a minor recession occur. 

If you need help investing in real estate, CrowdStreet can help you get started! Follow the link below for our comprehensive review and learn how to make business with them.

About the author

Aline Barbosa

Aline Barbosa is an editor, writer and learning-enthusiast. Passionate about music, books and human behavior. Curious about the unknown. Believer that learning is a life-long process.

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