After last year’s sharp equity market rally, the recent selloff serves as a reminder that the exit from the pandemic will be bumpy—and some markets still look pricey. Defensive stocks with attractive valuations can help provide balance through an uncertain recovery.

Market patterns last year were as extreme as the COVID-19 environment that created them—first a historic crash, then a dramatic rebound, driven by a small group of giant growth stocks. Late in the year, vaccine hopes boosted value stocks in sectors more sensitive to economic growth. Traditional defensive stocks were caught in the middle and lagged the market by the most in 30 years (Display).

Line charts depict extreme underperformance of global minimum volatility stocks and outperformance of growth stocks in 2020.

For many investors, this was surprising. After all, defensive stocks are prized for stable businesses and cashflows that help reduce risk, and market volatility was acute in 2020. The MSCI World and the S&P 500 rose or fell by more than 1% on 85 trading days and 109 days respectively—more than triple the number in 2019. The MSCI ACWI advanced by 16%, an unusually strong outcome given the shock to economies as well as consumer and business behavior. Yet volatility jumped to 28% in 2020 from 10% in 2019.

Hypergrowth vs. High Quality

Despite the volatility, investors preferred expensive stocks and companies with strong sales growth to an unusual degree. Hyper-growth companies surged with little regard to low profitability. Meanwhile, shares of defensive companies underperformed significantly, even though they generally have delivered relatively resilient earnings, despite the extreme uncertainty (Display).

A comparison of forecast earnings, share price changes and valuations between four growth industries and four defensive industries.