November 26, 2021

Cut Cyclical and Boost Defensive Equity Exposure

The Chart shows that relative cyclical/defensive equity performance is “joined at the hip” with long-term inflation expectations. This holds true for both domestic-oriented and global-oriented stocks. One-sided upside inflation surprises and a surging dollar cannot last forever. Higher equity volatility in 2022 should also lend support to defensive plays.

But not all defensive equities are created equal. Some normally stable companies, such as consumer and health care services, have been hammered by the pandemic. Others, such as commercial services, have been and will remain steady. Still others, such as utilities and telecom services, face structural headwinds like stranded energy assets that warn against bottom-fishing.