Winning with Defense

Looking for defensive investments to help combat market downturns? 

MVPs for Tough Markets

High-scoring returns during bull markets tend to get the most cheers. But stocks with the most return potential in up markets could be riskier, lower quality investments that may lose a lot of ground in down/bear markets. 

We believe winning over the long haul requires a well-rounded portfolio with a mix of positions that react differently as market conditions change. At times, your most valuable players (MVPs), may be higher quality stocks that seek to provide some defense when the going gets rough. 

Replay: What Happened to the Stock Market

Although there were stumbles along the way, the stock market found its footing to post a remarkable gain for 2019. It continued to hit new highs until mid-February 2020 when it plunged as the coronavirus spread across the globe, oil prices dropped dramatically, and a worldwide economic slowdown unfolded.

First-quarter stock-market declines wiped away earlier gains. Stock market represented by the Russell 1000® Index. Source: Morningstar. The index does not reflect fees, brokerage commissions, taxes or other expenses of investment. Investors cannot invest directly in an index. Past performance is no guarantee of future results.

High-Quality vs. Low-Quality Stocks

High-quality companies tend to have greater financial stability and the ability to grow through economic booms and downturns. By choosing these stocks, investors may have the opportunity to participate in much of the market’s upside, while reducing downside risk. 

Learn about five characteristics of quality companies

   

Read Enduring Case for Quality Stocks

How Owning Quality Stocks May Help

When the going got rough in the first quarter, high-quality stocks stepped up. As shown in the chart below, the higher its quality, the better a stock held its ground.

High-quality stocks performed better than low-quality stocks in the first quarter of 2020. Data from 12/31/2019 - 3/31/2020. Quality is based on S&P Quality Ranking System. Returns reflect an equal-weighted average of the return of stocks in the Russell 1000® Index by quality categorization. Scouce: FactSet, Merrill Lynch, U.S. Bureau of Economic Research. 

Getting to Your Financial Goals

Do you have enough high-quality companies in your portfolio to tackle downturns? Given their history of delivering superior performance with less risk over time, quality stocks may be a good option for many investors today.

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Explore a strategy designed to help investors build and preserve capital over the long term.

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A strategy or emphasis on environmental, social and governance factors ("ESG") may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do not have an ESG investment focus. A portfolio's ESG investment focus may also result in the portfolio investing in securities or industry sectors that perform differently or maintain a different risk profile than the market generally or compared to underlying holdings that are not screened for ESG standards.

Diversification does not assure a profit nor does it protect against loss of principal.

Russell 1000® Index is a market-capitalization weighted, large-cap index created by Frank Russell Company to measure the performance of the 1,000 largest publicly traded U.S. companies, based on total market capitalization.

The Quality Rankings System is managed by S&P Global Market Intelligence. It attempts to capture the growth and stability of earnings and the dividends record with a single rank. The rankings are generated by a computerized system and are based on per-share earnings and dividends records of the most recent 10 years. Basic scores are computed for earnings and dividends and, then, adjusted by a set of predetermined modifiers for changes in the rate of growth, stability within long-term trends and cyclicality. Adjusted scores for earnings and dividends are then combined to yield a final ranking.

The Quality Rankings are based on the following scale: 

 

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

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