Economic risks are piling up, and investors are starting to wonder whether shifting their focus to capital preservation is a good idea right now.
First, the Federal Reserve cut its benchmark federal funds rate by 0.25% in mid-September, with economic sentiment indicating further rate cuts by the end of 2025.
Then, a government shutdown went into effect on October 1, meaning federal funds are put on hold for an undetermined amount of time and layoffs from federal government jobs are likely. This has economists and investors anxious, especially as the September employment report from the Department of Labor has not been released.
It’s enough to make anyone question their faith in the economy.
We still have ongoing tariff troubles, with the White House signaling new trade taxes this week on items such as timber, lumber, and furniture. All while consumer spending is showing signs of slowing down.
That’s why experts are starting to look at defensive stocks to include in their portfolios, to protect some of the profits from this year’s rally in case markets begin to turn.
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U.S. heads of household are getting ready to snap their pocketbooks shut, even as the holiday spending season begins in earnest. “Consumer spending is expected to remain relatively strong for the remainder of 2025 before slowing more substantially in 2026,” said Michael Wolf, a global economist with Deloitte Touche Tohmatsu, in a new research report.
“Aggregate wages were growing faster than aggregate spending at the start of the third quarter—a change in trend that could support growth in the coming months. However, employment growth has slowed significantly, which will restrain aggregate wage growth and likely bring spending lower as well.”
Here's How To Play Defense When Times (And Moods) Get Tight
In an uncertain economic and market environment, investors often shift toward a defensive mode, focusing on ‘safe but not sorry’ sectors like utilities, healthcare, and defense spending (although the latter two may take a sting or two if the federal funding halt persists).
“Resilient sectors now are the ones with inelastic demand (people can’t cut it from their budget), pricing power (can pass rising costs through), and with a low refinancing risk (no balance sheet time bombs at 6% rates),” said Carlos Lascurain-Grosvenor, CEO of Grosvenor Square Consulting Group.
Lascurain-Grosvenor said his top defensive picks right now are retail, integrated energy, telecom, and healthcare.
Oil and gas stocks. For example, Exxon Mobil (NYSE:XOM) has strong free cash flow, integrated operations, and a reliable dividend. Lascurain-Grosvenor mentioned Chevron (NYSE:CVX) and TotalEnergies (NYSE:TTE). “Also, Chevron and TotalEnergies are similar in structure, with decades of consistent dividend increases,” he noted. “TotalEnergies combines oil and gas operations with growing energy transition exposure; yields have been in the 6% range as per some listings.”
Retail picks. Lascurain-Grosvenor likes Verizon (NYSE:VZ) and Costco (NASDAQ:COST) because it has consistently ranked among the top high-yield dividend stocks. “Additionally, Costco is not a value play, but has bulletproof inelastic demand,” he noted.
Anti-budget-busting proof picks. Doug Butler, SVP and Director of Research Services at Rockland Trust, recommends stocks that are not impacted when people face tighter personal budgets, including sectors such as utilities, consumer staples, and some financial services.
Butler recommends three stocks as defensive plays right now, including WEC Energy (NYSE:WEC), calling it “a solid midwestern utility,” Colgate-Palmolive (NYSE:CL) “People won't stop brushing their teeth and may even wash their dishes more since they'll be eating out less,” he said, adding Chubb (NYSE:CB) to his list. “Insurance companies tend to be very defensive as almost everyone needs property insurance even during recessions.”
Bonds are golden in tough times. Lucas Kiely, CEO of digital asset wealth manager Future Digital, says any selloff in markets would be sector-wide. “So if you’re worried about the economy, I’d hold treasuries because rate cuts are coming,” he advised. “And, in that scenario, treasuries will go higher. Don’t try to reinvent the wheel.”
Real estate funds with a kick. Segments of the real estate sector have been severely impacted by the banking industry’s withdrawal from traditional lending. “Banks have hundreds of billions of unrealized losses sitting on the books that they have to ride out, rather than fire sale,” said Paul Feinstein, CEO and founder at Audent Global Asset Management. “This gap has created an opportunity for funds in the space to generate strong returns.”
Feinstein particularly likes funds that leverage the beneficial tailwinds expected from rate cuts.
“We're looking at unique mortgage-backed security plays like AGNC Investment (NASDAQ:AGNC) and Annaly Capital Management (NYSE:NLY),” Feinstein said. “They have substantial dividends (16% and 14%), leverage that will benefit from rate cuts, and mortgage assets that should prove resilient when rate cuts facilitate home transactions for those previously stuck with mortgage interest rates 3-5% below the current market rate.”
Editorial content from our expert contributors is intended to be information for the general public and not individualized investment advice. Editors/contributors are presenting their individual opinions and strategies, which are neither expressly nor impliedly approved or endorsed by Benzinga.
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