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Warnings about credit challenges from Ally Financial on Tuesday could be the latest hint that the U.S. economy is drifting closer to a recession, but that doesn’t mean it’s time to rush into traditional defensive stocks. Lauren Goodwin, economist and chief market strategist at New York Life Investments, told CNBC that winning stocks are unlikely to fit neatly within defensive sectors at this point in the economic cycle. “If you’re concerned about growth, then it’s really quality equity that’s your play, and that can span across sectors. Sectors will ebb and flow and win and lose as we move closer to recession, but until jobless claims are reliably ticking higher or earnings growth is bad, I don’t see equity sectors being a consistent play,” Goodwin said. When Wall Street pros refer to “defensive stocks,” they typically are pointing to types of companies that have sales that are more resilient during economic downturns, such as utilities and hospitals. “Quality” is an investing factor focused on measures of a company’s financial strength, and those stocks can theoretically be found in any industry. Goodwin also said the election cycle can create some sector volatility between now and November as investors try to gauge how different outcomes could change policy in the years to come. Another thing for investors to consider is that some of the traditional defensive sectors have already been on an upswing. The Utilities Select Sector SPDR Fund (XLU) is up 13% in the third quarter, possibly getting a boost from the projected energy needs from artificial intelligence. Meanwhile, the Consumer Staples Select Sector SPDR Fund (XLP) is up 9%, and Health Care Select Sector SPDR Fund (XLV) is up more than 6%. XLU mountain 2024-07-01 Defensive stocks like consumer staples have performed well in the third quarter. Instead of moving to defensive stocks, investors should focus on looking for ways to lock in higher yields in fixed income before the Federal Reserve begins cutting rates, said Goodwin.
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