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  • buffetmunger buffetmunger May 17, 2013 10:23 AM Flag

    Defensive stocks due for a pullback Commentary: There are some signs of a bubble


    Defensive stocks due for a pullback
    Commentary: There are some signs of a bubble
    In a year full of surprises for the market (pleasant surprises, I might add), one of the biggest of all has been the stunning performance of defensive stocks, those steady, low-beta stocks that tend to zig when the economy zags.

    These dull, stodgy securities, which Wall Street often derides as “widows’ and orphans’ stocks,” are now as glamorous as the high flyers of yesteryear.

    Soporific sectors like health care, utilities, and telecom have led the market this year, rivaling traditional bull market pace setter consumer cyclicals.

    As of last Friday, health care led the pack, with a 20.6% gain in 2013, followed by consumer discretionary (up 19.6%) and consumer staples, which have gained 17.6%, according to Standard & Poor’s Capital IQ. The S&P 500 has risen 14.6% this year, as of last Friday. It’s the tortoise and the hare on steroids.

    The explanation boils down to two words: yield and risk.

    The Federal Reserve’s (and other central banks’) extraordinarily loose monetary policies have driven interest rates down close to zero. Ten-year Treasuries yielded 1.94% Wednesday, high yield has become low yield, and longer-term Treasury Inflation Protected Securities lock in negative returns for the next 15 years.

    Read Gold’s analysis of whether TIPs are still a good buy.

    In this environment, investors, while still licking their wounds from the financial crisis and market crash of 2008-2009, are willing to take a little more — and I stress a little more — risk to get some yield.

    So, defensive stocks, which usually pay dividends higher than the market, seem like a reasonable compromise between risk and reward.

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