Seeking Safety This Summer

By Aaron Levitt | June 22, 2012 AAA

With the Greek election still not calming fears about a complete eurozone collapse, volatility has once again been flooding the markets. Adding this to the recent poor jobs number from the United States and slowing economic growth in key emerging market nations like China, it's no wonder investors are on edge. These problems have caused the markets to steadily trend sideways since the end of April. As the immediate-term economic outlook is hazy at best, investors may find that a strong defense is the best offense.

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Trouble Brewing
Overall, the news keeps getting worse for the global economy. Greece's inability to pay back its debt has once again made front-page news as the nation headed to the polls this past weekend. While the pro-bailout government won the general election, analysts predict that it will be a moot point in the overall debt crisis. Both Spain and Italy are at significant risk of being engulfed by the crisis as their borrowing costs continue to rise.

At the same time, rising star China has been hit by slowing economic growth. Industrial output in the nation has fallen for the seventh straight month, with investment bank HSBC's (NYSE:HBC) PMI report on China's industrial activity showing a downtrend. The metric fell to 48.7 in May, down from a reading of 49.3 in April. Additionally, retail sales have slowed and data has shown that China's trade surplus has widened after both imports and exports drifted lower.

Finally, in the U.S., the economy is appearing to slow down. Hiring crawled to a near standstill last month, with only 69,000 new jobs added; that's the weakest growth in a year and the unemployment rate rose to 8.2%. This lack of jobs is having a dramatic effect on consumer confidence and spending.

Three Defensive Sectors
With all the headwinds facing the global economy, it's no wonder the major stock indexes have trended downward over the last few weeks. The iShares MSCI ACWI Index (Nasdaq:ACWI) seems to shudder every time there's more bad news. For investors, the time could be right to seek shelter in those sectors that tend to do well in constrained environments. By focusing on these defensive measures, investors could avoid some of the worst effects of a possible summer downturn. Here are some top picks:

As volatility returns to the market, investors may want to look toward their pantries and medicine cabinets for stocks. After all, the companies that produce food, toilet paper and soap may not be exciting, but they tend to be very predictable and normally generate positive free cash flows. Their non-cyclical nature makes them perfect additions for a portfolio looking for shelter. Firms like Church & Dwight (NYSE:CHD) and B&G Foods (NYSE:BGS) make ideal selections to the play the sector, but the best bet might be the broad Vanguard Consumer Staples ETF (NYSE:VDC). The fund spreads its $1.1 billion in assets among 108 different consumer staples firms, with an emphasis on products, rather than retailers. The fund charges a cheap 0.19% in expenses and yields a market beating 2.8%.

Like consumer staples, the utility sector offers the right combination of safety and dividends that investors should look for in order to get them through the current turmoil. Even in times of duress, people need to heat/cool their homes and keep the water and electricity flowing. The Utilities Select Sector SPDR (ARCA:XLU) offers a great 3.87% yield and broad way to play the sector, while water utility Aqua America (NYSE:WTR) and electricity provider Consolidated Edison (NYSE:ED) represent two dividend stalwarts in the space.

Finally, despite all the hub-bub surrounding the Obamacare Act, the healthcare sector offers another place for investors to seek solace from the market turmoil. Additionally, the sector has been one of the few areas of market to see continued job growth over the last 10 years. The iShares Dow Jones US Healthcare (ARCA:IYH) tracks 122 healthcare heavyweights including Merck (NYSE:MRK) and UnitedHealth Group (NYSE:UNH). The ETF makes a great way to add the sector's safe status.

SEE: How To Pick The Best ETF

The Bottom Line
With uncertainty plaguing three of the world's most important economic regions, investors have the right to be nervous. To that end, a defensive stance could be the best offense going into the summer. The consumer staples, healthcare and utility sectors offer three great ways to stay defensive in the turmoil. The previous picks, along with the broad Guggenheim Defensive Equity (ARCA:DEF), make ideal selections to play those sectors.

At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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