Two catalysts have significantly changed the market's tune and trend. In fact, as the S&P 500 (SPY  ) is about 25% lower for the year, the fundamentals are in a much worse place, and there's an increasing likelihood that these lows are re-tested and broken.

This backdrop certainly makes it more challenging to earn returns on the long side, but it's possible especially if investors know where to look:

Consumer Staples

The biggest threats to the market are that inflation is stubbornly high, and this is causing the Federal Reserve to take an ultra-aggressive hawkish stance when it comes to monetary policy. The second is that the economy is slowing. These factors tend to lead to multiple contractions and a decline in earnings.

These factors are bad for most sectors, but consumer staples are an exception. This sector is comprised of companies that sell essential items like paper towels, toilet paper, soap, etc., whose demand doesn't fluctuate based on economic or monetary factors.

If we look at the Consumer Staples Select Sector SPDR Fund (XLP  ), we can see that it's only down 10% over the last 6 months with the market down over 20%.

Aerospace and Defense

A commonality among the best-performing sectors is that their revenues are quite stable and unaffected by the business cycle or interest rates. Another in this group is the aerospace & defense stocks. Defense spending is a trend that keeps rising, while these companies' primary customers are governments with massive budgets that are also mostly unaffected by the business cycle.

And, this year there is a unique catalyst due to the Russia-Ukraine war and the potential of China invading Taiwan. Thus, countries all over the world are realizing that they need to take their security needs seriously and are bolstering their defense spending, especially in Europe.


Utilities also have these circumstances in common with defense stocks and are outperforming with a more than 1% gain. These companies' revenues are also stable and transcend near-term economic challenges. They also pay generous dividends which are more attractive in times of uncertainty.

Finally, due to rising energy and electricity prices, margins have also been climbing for utilities (although many are regulated). For instance, the Utilities Select Sector SPDR Fund (XLU  ) pays a 2.8% yield and is up 5% over the last year. In contrast, the S&P 500 is down 15% over the past year and pays a paltry 1.6% yield.