2019 has been an incredible year for stocks. But as we head into 2020, now may be the time to start getting defensive.
Uncertainty around the trade war and the 2020 election is painting a darker picture for the year ahead, and many on Wall Street are sounding the alarm. Trade war jitters surrounding the December 15 tariff deadline have even seen the volatility index—the VIX or the market’s “fear gauge”—spike this week, indicating that investors may be turning bearish.
UBS says the market could come under pressure next year as the economy continues to slow, and Morgan Stanley is bearish on next year and says now’s the time to buy defensive stocks.
“We expect the market to vacillate between a pro-cyclical outcome and a defensive one as data comes in and trade tensions and the election evolve,” said Mike Wilson, Chief U.S. Equity Strategist for Morgan Stanley. “We slightly favor the more defensive outcome given our well below consensus forecast for S&P 500 earnings growth next year (flat versus approximately 10% growth for the bottom up consensus).”
Wilson says the S&P 500 will close at 3,000 next year, -4.5% below where the index is at now, while the consensus target is for the index to climb to 3,325 by the end of 2020.
Stocks in the healthcare, utilities, and consumer staples sectors are considered defensive because, even when times are tough, consumers still require healthcare, still need electricity and water service, and will still need to buy things like toothpaste.
Some of the most loved defensives include CVS Health (NYSE: CVS), Medtronic (NYSE: MDT), NextEra Energy (NYSE: NEE), Sempra Energy (NYSE: SRE), Stryker (NYSE: SYK), Tyson Foods (NYSE: TSN), and Walmart (NYSE: WMT).
Healthcare stocks like CVS, Medtronic, and Stryker are some of the best rated of the bunch with analyst price targets indicating 14%, 9.77%, and 16.78% upside, respectively, over the next year.
Medtronic offers a 1.95% dividend yield and has consistently increased its dividend for more than four straight decades. The medical device company’s shares are up nearly 23% this year, and Medtronic saw double-digit international sales growth last quarter. The company has several new products coming down its pipeline, and CEO Omar Ishrak said he anticipates the second half of fiscal 2020 will see bigger growth and that new product launches in fiscal 2021 will generate strong growth.
CVS, on the other hand, has roughly 10,000 retail locations and serves more than 4 million customers a day. It has been a year since CVS acquired Aetna, which turned it into the largest pharmacy in the country.
“We are a health care company today,” said CVS Health CEO Larry Merlo. “We have an opportunity, putting the consumer at the center of our strategy to transform the way health care is delivered in our country.”
As for utilities, Wall Street is bullish on NextEra Energy, the nation’s largest producer of wind and solar energy. JPMorgan said in a note that NextEra has delivered 8% to 9% earnings growth to shareholders and offers a 2.13% dividend yield.
“Gulf Power growth from cost cuts and new investments is also expected to be a major driver of growth in the next 2 years,” wrote JPMorgan analyst Christopher Turnure in a note to clients.
The firm has an Overweight rating on NEE shares and a price target of $252 – nearly 7% higher than the current price.