The ability of companies to weather a downturn without having to raise more cash and dilute investors is a common theme among stocks that become popular during downturns. Goldman Sachs has several baskets of stocks that fit into this theme, and those groups of names are updated on a regular basis to serve as reference points when the market falls.
In March, the company issued a note outlining its various baskets. Some of the current constituents for more defensive themes are shown in the charts below.
According to Goldman, investors should consider these stocks if they are concerned about the overall economy or market stability.
The high-quality basket is sector-neutral, which means it contains the highest-rated names in each category. Goldman’s current list includes stocks ranging from tech behemoth Alphabet to discount retailer Dollar Tree.
Goldman has a dividend growth stock basket for investors looking to stabilize or even increase their income from investments during a difficult period. To increase dividends during a downturn, a company’s fundamentals and cash flow growth must be strong.
The current group includes Verizon, which was one of the few major stocks to rise on Monday despite the sell-off.
Goldman’s strong balance sheet group is based on stocks with the best Altman Z scores, which is a calculation used to estimate the risk of bankruptcy, for investors looking to avoid worst-case scenarios.
As many companies have several appealing qualities during a market downturn, the full list of stocks for each basket shows significant overlap. Fastenal, an industrial supply company listed in the strong balance sheet table, appears in all three baskets.
Fundstrat Global Advisors’ Tom Lee said Monday that the deepening sell-off in the stock market represents a buying opportunity for investors.
Following Monday’s decline, the S&P500 is down 3.6 percent for the month of September, which has historically been a weak month for Wall Street.
Investors are concerned about the impending collapse of one of China’s largest property developers, debt ceiling discussions in Washington, Federal Reserve policy, and seasonal weakness.
“This is going to be a really good buying opportunity,” Lee predicted: “I would look at sell-offs like this, which are broad-based selling, as an opportunity to add incrementally, fully aware that it may not be bottoming today.”
“We’re at a point where everyone is only seeing darkness and downsides, and that’s usually when you want to add risk,” he added.
Lee does not believe stocks will fall to their lowest point on Monday or Tuesday, but he does believe the market will recover this month.
“We’re going through a lot of chop right now,” Lee said, “but… I think we’re going to finish strong seasonally.”
“I believe September has a real chance to turn things around.”
With the S&P500 up more than 16% this year, Lee believes stocks will continue to rise in the long run.
“There are plenty of risks out there, and I don’t think stocks are invulnerable, so they can always fall dramatically,” Lee said, adding that “structural tailwinds are in place for the S&P to rise for quite some time.”
Cramer advises to sell
“We’ve been encouraging people to sell. It’s been difficult to tell people they need to sell. I’m not going to stop it. “I continue to believe you sell,” Cramer said on “Squawk Box” on Monday.
Starting last Friday, the “Mad Money” host has been warning about the back half of September as historically the worst stretch of seasonal weakness seen in September and October.
Cramer stated that he does not see a buy level for stocks yet, as Dow futures fell more than 650 points, or nearly 2%. The Dow Jones Industrial Average then opened on Wall Street less than 600 points lower and quickly cut those losses even further.
Fears of the collapse of embattled Chinese property developer Evergrande Group, the fight in the United States over raising the debt ceiling, and questions surrounding this week’s Federal Reserve meeting and hints on when central bankers might start tapering their bond purchases all contributed to widespread selling.
“I do believe we will reach a buy point” for stocks such as Pfizer, which announced Monday that its Covid vaccine is safe for children aged 5 to 11, according to Cramer. “But we’re not quite there yet.”
The convergence of all of these concerning factors prompted investors to sell stocks and risky assets and buy bonds. The 10-year Treasury yield, which moves inversely to price, fell to around 1.32 percent on Monday. Bitcoin, which had seen some recent strength following a summer sell-off to below $30,000, fell 10% on Monday. In early trading, the world’s largest cryptocurrency was trading for less than $43,000.
Because U.S. banks are not permitted to do business in China, Cramer is less concerned than many others about the potential financial market contagion risk of an Evergrande bankruptcy. As a result, “our banks are the safest banks in the world,” he added. “I believe China’s problems have come as a surprise to many people. But some of us have been talking about it for weeks.”
From a nationalistic standpoint, he stated that trouble for Chinese businesses is a “good thing, not a bad thing” for the United States, as Washington competes with Beijing for the hearts and minds of the world economically and socially.
Should investors get defensive?
Investors will be looking for clues about when the Fed will begin withdrawing its asset purchases, which have increased the money supply and stimulated the economy during the pandemic, at its September meeting next week.
Fed Chair Jerome Powell has previously stated that tapering will most likely begin before the end of 2021.
There is little precedent for how the stock market would respond to the Fed’s tapering. Because the Fed first used quantitative easing following the Great Recession, the only other taper in US history occurred from January 2 to October 31, 2014.
A look back at the 2014 taper period can provide some insight into which types of stocks may be safe bets for investors this time around.
According to a Ned Davis Research analysis of S&P500 sector performance from May 22, 2013, to January 2, 2014, cyclical growth and cyclical value sectors outperformed the market and defensive stocks in the run-up to the taper.
However, “leadership quickly turned defensive once the taper began,” according to the report by Ned Davis Research’s Rob Anderson and Thanh Nguyen.
According to Ned Davis Research, cyclical growth stocks are those in the consumer discretionary, information technology, and communication services sectors. Energy, materials, industrials, and financials are examples of cyclical value stocks.
According to the firm’s analysis, the real estate, health care, and utilities sectors saw the highest returns during the taper period, all gaining more than 20% compared to the S&P500’s 10.2 percent gain. Meanwhile, consumer discretionary and energy were the two worst-performing sectors during the 2014 taper, each declining by 0.3 percent.
While history suggests that when the Fed begins to taper asset purchases, Ned Davis Research emphasizes that “COVID remains the biggest driver of leadership trends.”