Trading Nation

A classically safe sector could 'dramatically' outperform into year-end

Debating the outlook for safety stocks

Recent bouts of volatility have sent investors flocking to the so-called safety stocks, and it could be your best way to play catch-up into year-end, according to one strategist.

Consumer staples has outperformed recently, rallying more than 3 percent this month, making it the second-best-performing sector. The sector got a boost this week from a string of positive news out of some names such as Wal-Mart.

Larry McDonald, founder of the Bear Traps Report investment newsletter, expects the upside for the group will likely continue, particularly over the next 6 months, as value stocks fall back into favor and volatility picks up.

The sector is a classically safe place to be in times of market turbulence, which may come about by year-end, McDonald said Thursday on CNBC's "Trading Nation." He also finds its underperformance in recent months attractive and sees the space as a sort of catch-up trade.

"You have a situation where if the market corrects because of this tax bill running into some problems over the last month or so, let's say it gets pushed back ... as the market rolls over and goes into some type of correction, historically that's when this sector, the defensive stocks, dramatically outperform," he said.

Others aren't so rosy on the prospect of consumer staples stocks' outperformance continuing, as growth stocks have overtaken value for much of this year. That trend won't likely shift in the near-term as high-flying technology stocks lead the market, said Kim Forrest, senior portfolio manager at Fort Pitt Capital Group.

"I would love it if value would come back in style, and a market that does nothing but go up is not going to give us that," Forrest said Thursday on "Trading Nation."

Furthermore, she said that some of the life recently breathed into the staples has been the result of investors' hunt for dividend yield. Forrest pointed specifically to General Electric recently slashing its dividend in half.

"I think we've seen a rebound recently in things like staples and utilities because the people who are leaving GE, and were in GE for the dividend, are looking for a home for that money where it is going to return dividends. Typically, staples and utilities, for that matter, are two places where you can get 'Steady Eddie,' or so investors think, returns or dividends paid out to you," Forrest added.

The sector was lower in Friday trading.

Playing catch up with consumer staples