Time to Lighten Up Exposures?
The current economic doldrums have most investors concerned about a potential market downturn. The core worry? Stagflation.
The Stagflation Risk
Stagflation is the dreaded combination of flat economic growth with indefinitely rising inflation. We may be approaching a time where this concern becomes so widely held that it gets reflected by the market.
Seasonal Under-performance
The six months from May to October historically under-performs the October-April period by about 500 basis points (1926-2026 data). While not a guarantee, it compounds current economic fears.
Earnings Pressure
During high inflation and stagnation, sales rise less quickly than costs. The stock market typically struggles to tread water in the first 6-to-12 months, often declining into correction territory.
Strategic Sector Shifts
When stagflation is anticipated, active asset managers rotate out of growth-oriented sectors and into "old economy" stocks that hold real assets and can pass increased costs to consumers.
❌ Sectors to Lighten
- ▪ Consumer Discretionary
- ▪ Industrials
- ▪ Technology
- Avoid: High P/E, High Beta, Zero Dividends
✅ Sectors to Target
- ▪ Energy & Materials
- ▪ REITs & Financials
- ▪ Consumer Staples & Healthcare
- ▪ Utilities
Defensive Stock Screen Results
This section presents 26 stocks resulting from our defensive quantitative screen. The criteria aimed for safety and value: VE Rating 4 or 5, Top 50% Valuation Rank, P/E < 25, Beta < 1.25, pays a dividend, and Market Cap > $5 Billion.
Industry Concentration
Notice the heavy weighting towards foreign banks and mining/energy. Less than 10% of our covered universe is foreign, making this concentration highly notable.
Screened Stocks (26)
| Ticker ⇵ | Company Name ⇵ | Industry ⇵ | VE Rating ⇵ | Fwd P/E ⇵ | Div Yld ⇵ | Country ⇵ |
|---|
Sector Diversification Opportunities
While the 26-stock list adhered to desired defensive sectors, some key areas like Consumer Staples, Health Care, and Utilities had no stocks rated 4 or 5 that passed all stringent screens. To provide diversification, we present top-performing Hold (3-rated) stocks in these missing sectors.
SCI
Service Corp Intl.
Provides funeral and cemetery services.
TMO
Thermo Fisher
Manufacturer of scientific instruments and supplies.
OGS
ONE Gas Inc.
100% regulated natural gas distribution utility (TX, OK, KS).
Low-Beta ETF Alternatives
Individual stocks carry higher price volatility. For safety, many prefer ETFs to divert growth-index-benchmarked assets. We screened for ETFs with Beta <= 1.00, Dividend >= 2%, P/E < 20, and AUM > $500M.
Explore the risk/reward landscape below compared to major market benchmarks.
Risk vs. Valuation Mapping
X-Axis: Market Sensitivity (Beta). Y-Axis: Valuation (P/E). Bubble Size: Dividend Yield.
Goal: Target the bottom-left quadrant (Low Risk, Low Valuation) with large bubbles.
Highlighted Defensive ETFs (Hold Rated)
DIVB
2.3% YldiShares Core Dividend
Low-cost approach focusing on companies that aggressively return capital via dividends and share buybacks.
FDRR
2.2% YldFidelity Dividend for Rising Rates
Tilts away from traditional yield traps (Utilities/REITs) toward pro-cyclical areas (Financials, Industrials) designed to withstand rising rates.
FDVV
2.8% YldFidelity High Dividend
Captures a unique hybrid of traditional high-yielders and high-growth technology giants paying growing dividends.
Niche 5-Rated Opportunities
By relaxing AUM and Yield constraints, two Strong Buy (5) rated ETFs emerged. Intriguing methodologies, but note higher fees and smaller asset bases.
ALTL - Pacer Lunt Large Cap Alternator
Dynamically rotates its holdings between low-volatility and high-beta U.S. large-cap stocks based on market momentum.
AADR - AdvisorShares Dorsey Wright ADR
Actively managed international equity exposure utilizing a systematic relative strength strategy to identify strong global momentum.
Conclusion
Generally speaking, we advise most people not to try to time the market, to stick to their investment plans and criteria, and to ignore the fear-mongering of so-called experts. However, there are times when hedging one’s bets and sacrificing some potential price gains for less susceptibility to major losses makes sense.
An environment where higher-for-longer inflation rates are expected to be combined with a stagnant economy is quite concerning. Asset management, like life, is a series of trade-offs and tough decisions. Smaller portions of investment portfolios can be moved into such safer options; it is not all or nothing.
