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Domestic defensive dividend-paying stocks are best in this market: Strategist

Lawrence Lewitinn
Lawrence Lewitinn

The best way to invest in these turbulent markets could be by playing defense.

The first two weeks of 2016 have been the worst ever for the market, with the S&P 500 (^GSPC) down 9% since the start of year. Commodities are viewed by many in the market as canaries in the coal mine, according to Alec Young, investment strategist at OppenheimerFunds. He sees weak commodity prices as a signal for investors that the world’s economy is slowing.

However, Young attributes lower prices in commodities to increased production, not a slack in demand.

“We're a little bit less worried about this than some other investors,” he said. “But clearly there's a lot of concern right now that global growth is going to come in a little weaker than people thought, especially in places like China and other emerging markets, and that's going to take a little bit of a bite out of corporate America's punch this year. So people are marking stocks down to reflect that risk.”

Fears about the market’s health temper the Federal Reserve’s drive to raise rates, according to Young. Though the Fed was expected to do as many as four small rate hikes over the course of the year, the market now only anticipates two such increases, he said.

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“They probably don't tighten in March,” Young predicted. “But what we really need is a message from them that's clear that they're going to take it a little slower than what they had been saying a couple of months ago. That's probably not going to come in May or June.”

Besides more dovish guidance from the Fed, the markets also need significantly better-than-expected reports this earnings season, he said.

In the meantime, Young recommends that investors “stay domestic, stay defensive, and look for a nice dividend yield.” He suggests holding countercyclical and defensive stocks such as telecom, utilities, consumer staples, household products, food, and tobacco.

“Those kinds of companies are outperforming,” he said. “Having a nice dividend yield in the 3% to 4% neighborhood or higher doesn't hurt, either.”

“It's good when you get this volatility because it gives you a great long-term entry point,” he added.

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