U.S. and China trade relations continue to fester and it's not yet clear the uncertainty regarding the relationship between the world's two largest economies is going away any time soon. This may mean defensive stocks are good buy, as they are less economically sensitive and better insulated from the impact of tariffs.
Wednesday, Bloomberg reported that China has said it will entertain a partial trade agreement with the U.S, sending all three major U.S. indices higher, with the S&P 500 up 0.9%. This comes after weeks of market pessimism on trade talks, as the U.S. stock market is down just under 2% in the past month.
Regarding trade relations, "Right now, it's everything [for the market]," Jerry Kronenberg, TheStreet's managing editor said. He mentioned blue chip stocks like Apple (AAPL) , Nike (NKE) and Home Depot (HD) , as those companies "either source a lot of stuff from China or sell a lot of stuff to China or both, so they want this whole thing to go away." As the positive news out of China broke Wednesday, Apple shares rose 1.06%, Nike rose 0.92% and Home Depot rose 0.63%.
Those are more cyclical companies, so when they incur higher costs to produce items, and subsequently raise prices, they see a drop off in demand. Whether they absorb tariff costs or pass them on to consumers, they are likely to see earnings growth take a hit. For Apple, some analysts have worried that anti-American sentiment may weigh on sales in China, although proof of that has not emerged.
TD Ameritrade Trading Strategy Manager Shawn Cruz said "Sectors that you can look at right now are sectors with a little bit more of those defensive qualities, and those actually experience less volatility over the course of this trade spat with China." He suggests considering consumer staples, utilities and real-estate.
But "you may want to pull healthcare out of that defensive type of category, because as we get closer to the election and we start to see rhetoric heat up out of Washington, that's driving a lot of volatility in the healthcare sector," Cruz added.
The Invesco Consumer Staples ETF (XLP) is up 1.5% in the past month, with the broader U.S. market down roughly 2%.