These two sectors could provide shelter from future market storms

Published Mon, Dec 21 20202:02 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

Stocks within the tech and health care sectors may help shelter portfolios from the worst of market storms. Markets took a hit early on Monday, before rebounding back to near the flatline as the day went on. Still, the volatility could be a sign equities are getting vulnerable to a correction as it closes out a big year. Strategists say investors getting nervous into year-end should stick with stocks that may not rally as much as the broader market, but may not fall as much either if there 's a deeper pullback. And where they usually go for market protection may not work this time, they said. "It's a real interesting point today. Certainly defensive is not the place to hide...The one thing that stands out is tech," said James Paulsen, chief investment strategist at Leuthold Group. Utilities were down 1.5% and consumer staples were off 1%, while tech was little changed in afternoon trading as the market reversed losses. Both tech and health care have some defensive characteristics, but also could go higher as the distribution of vaccines helps the economy reopen next year. During the pandemic, technology has been viewed by some strategists as a safety play, since it has earnings growth that in some cases was unaffected by the economic shutdowns, and some companies were winners in the stay-at-home strategy. "We're overweight tech and health care and financials. Of those three, financials are not going to participate if things get worse in the near term, but health care and tech will," said Jonathan Golub, chief U.S. equity strategist at Credit Suisse. "In tech, software is going to do better than semis." Software giant Microsoft, for instance, was higher Monday, and other names in the sector, like Oracle and Salesforce.com were holding up during the sell-off and were flattish. Chip maker Intel, on the other hand, was lower, along with Texas Instruments and Broadcom . As for health care, Golub said he likes medical devices. "That's driven by elective surgeries. Those are companies that would be huge beneficiaries of the reopening trade...During a period of heightened concern, big pharma is going to do better than medical devices," he said. "This is the cheapest they've been relative to the broad market." Big pharma names, like Pfizer, Bristol-Myer Squibb and Merck all have dividend yields of more than 3%. Golub said other names should also hold up better in a sell-off if they have characteristics of high-quality. "Focus on high quality companies with growth and companies with less debt. I want companies with higher returns on assets, or return on equity. I want companies that are less susceptible to big price declines," Golub said. Golub said if investors look for stocks with those characteristics, they may not rise in market pull backs but they will not fall as much. "You have a lot of those in health care names, which have strong growth and decent quality. You have good quality in consumer staples but they don't have a lot of growth," he said. In technology, the FANG names benefitted from the stay-at-home trade, and they could again, and Fundstrat's Tom Lee says he likes some big tech as a safety play, along with the cyclicals he is recommending for 2021. He said big companies with solid earnings like Apple and Microsoft should continue to perform. "I think people want to go with the Nasdaq," said Lee. "I think FANG comes out looking pretty good. It seems every time Facebook gets dinged the stock comes back stronger." Amazon , Netflix and Google parent Alphabet are also FANG stocks. From a technical perspective, Ari Wald, technical analyst at Oppenheimer points out that tech has outperformed when high beta stocks were taking the lead and also when defensives led. "It really is all weather," he said. "I think with this slow growth economic backdrop, tech has received a premium for that reason. I think in the overall macro backdrop, it's still going to provide some of the steadier returns." Wald said within technology, the software and services sector looks good, after breaking out last week. "Broad-based strength exhibited in the group is a key positive and makes it a compelling idea, in our view," he noted. Some of the stocks he likes are Coupa Software , Fortinet , Everbridge, and Wix.Com .

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NYSE

Stocks within the tech and health care sectors may help shelter portfolios from the worst of market storms.

Markets took a hit early on Monday, before rebounding back to near the flatline as the day went on. Still, the volatility could be a sign equities are getting vulnerable to a correction as it closes out a big year.

Strategists say investors getting nervous into year-end should stick with stocks that may not rally as much as the broader market, but may not fall as much either if there 's a deeper pullback.

And where they usually go for market protection may not work this time, they said.