A Cushion for Uncertain Times

As the outlook clouds, investors can protect themselves from market shock.

Scarcely a day goes by that doesn't raise new questions about the strength of the economy and the durability of the stock market. Each news bite is scrutinized intensely, and a bipolar stock market soars one day and sinks the next depending on the soothsaying du jour. We think even the gloomiest scenarios have bright spots, such as opportunities arising as manufacturers and multinational companies capitalize on the improving trade picture and robust economies abroad.

But we also recognize that this is one of those stock-market moments when you want to cocoon yourself in the bubble wrap of the most shock-resistant holdings. In economically unsettled times, that means stocks of companies that make the things we keep buying, no matter what.

Who's going to stop eating, brushing his teeth or diapering the baby? That's why so-called consumer staples have beaten the overall market 90% of the time during the 11 recessionary periods since 1945, according to Standard & Poor's. Within that group, household products have gained nearly 2% on average, but alcoholic-beverage makers have risen 6% on average, and tobacco companies nearly 10%.

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Utilities and health-care stocks are dependable. Ironically, financial stocks usually hold up well when economic times are tough. But not this go-round, with financials at the epicenter of the subprime-mortgage mess. Instead, look for stock-market "airbags" in companies such as Colgate-Palmolive (symbol CL (opens in new tab)), Abbott Laboratories (ABT (opens in new tab)) and gas utility Nicor (GAS (opens in new tab)). Or explore exchange-traded funds that mimic broad sectors, such as Vanguard Consumer Staples (VDC (opens in new tab)), iShares Dow Jones US Healthcare (IYH (opens in new tab)) and S&P's Select Sector SPDR-Utilities (XLU (opens in new tab)).

A stake in dividend-paying stocks is a classic refuge (utilities fit this bill, too). If the economy stagnates and the stock market loses luster, you'll still collect a check four times a year. The key is choosing companies whose dividends are dependable. Be wary of newly high-yielding financial stocks on that score. Instead, check out old stalwarts, including Kraft Foods (KFT (opens in new tab)); an ETF, such as S&P's SPDR Dividend (SDY (opens in new tab)); or a mutual fund, say, Alpine Dynamic Dividend (ADVDX (opens in new tab)).

There's a fine line between precaution and panic. Don't dismantle a well-reasoned portfolio. On bleak trading days, remember that the stock market has telegraphed 75 of the last 11 recessions. In other words, 64 of the market selloffs since 1945 have not been linked to recession, and most of the dips soon reversed course.

Shying away from some stocks you'd normally avoid when the economy wanes could be a mistake now, says investment strategist Ed Yardeni. Industrial and materials companies (metals, paper and cement, for example) have the worst records during recessionary periods. Yet Yardeni, bullish on staples, health care and utilities, is recommending that investors load up on industrial, materials and energy stocks and avoid housing, finance and retail shares. The message: Seek beneficiaries of the global boom, shun victims of domestic gloom, and keep your defenses up.

Anne Kates Smith
Executive Editor, Kiplinger's Personal Finance

Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage,  authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.