With Stock Market Indexes Near All-Time Highs, Don’t Forget Defense

February 26, 2021

Earlier this month the S&P 500 Index1, the Nasdaq Composite Index2, and the Dow Jones Industrial Average3 all closed at record highs.4 Optimism around additional stimulus policy out of Washington and a return to economic growth with the rollout of COVID-19 vaccinations are two of the reasons being cited for the most recent bullish price action.4 In the current environment, defensive equities may not be on most investors’ radar. At Reaves, we believe perhaps they should be.

It was almost 12 years ago - March 6, 2009, to be precise – that the S&P 500 Index bottomed at an intraday low of 666.79 in the wake of the Great Financial Crisis.5 This widely watched barometer of the U.S. stock market had just completed a 10-year period with a cumulative total return of negative 29.5%.6

Today we are at the other end of the spectrum. A passive investment in the S&P 500 Index has compounded at an annualized total return of nearly 17.0% since early March of 2009 through January of 2021, which is substantially higher than its 10.7% annualized return since 1970.

With the benefit of hindsight, the right thing for an investor to do 12 years ago was to allocate additional dollars to common stocks. Is that the best course of action today? No one knows how much longer the current bull market will continue, but we believe investors may benefit from shifting some funds to more durable, defensive equity strategies.

The Good News: Defensive Equities Are Doing What We Expect

At Reaves, our Long Term Value Strategy7 focuses on essential service infrastructure companies that support the foundations of our modern economy – utilities, wireless tower companies, broadband providers, data centers, and railroads, for example. We are unapologetically defensive in our belief that such a strategy has a role to play in a broader portfolio by offering investors an equity solution to weather economic and market downturns when other equity strategies may struggle.

We realize defensive stocks may not be in investors’ focus right now. But for those needing a reminder of what these companies can do, we point to the economic downturn of 2020 as an important litmus test for the industries in which we invest.

The dividend growth rate of the companies owned in Reaves’ Long Term Value Strategy was 6.7% in 2020, a sign of resiliency in a challenging year.8 In contrast, the dividend growth rate of the S&P 500 Index was 0.1%.9

The ability of many companies that we categorize as essential service infrastructure to generate profits in tough times, and not only maintain, but increase, dividend payments to shareholders, is why we believe investors may need more exposure to this defensive segment of the market.


Investors: You Asked, We Answered.


Reaves Asset Management is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply any skill or training. Reaves is a privately held, independently owned “S” corporation organized under the laws of the State of Delaware.

The information provided in this blog does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities and sectors listed. Investors should consider the investment objective, risks, charges and expenses of all investments carefully before investing. Any projections, outlooks or estimates contained herein are forward looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur.

1 The S&P 500 Index (“S&P 500”) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The typical Reaves portfolio includes a significant percentage of assets that are also found in the S&P 500. However, Reaves’ portfolios are far less diversified, resulting in higher sector concentrations than found in the broad-based S&P 500.

2 The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.

3 The Dow Jones Industrial Average, is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

4 https://www.wsj.com/articles/global-stock-markets-dow-update-02-12-2021-11613119349; February 12, 2021

5 https://markets.businessinsider.com/news/etf/stock-market-investing-financial-crisis-bottom-worth-2018-3-1018541453; March 9, 2018

6 Time period: 3/1/99-2/28/09

7 Beginning December 2019, Reaves LTV Strategy is represented by the LTV SMA Wrap Composite. This composite contains those LTV discretionary portfolios with wrap (bundled) fees. Wrap accounts are charged a bundled fee which includes the wrap sponsor fee, as well as, Reaves’ investment advisory fee. Due to compliance requirements, the net-of-fees calculation is computed based on the highest annual fee assigned by any wrap sponsor who utilizes this portfolio in an investment wrap program (300 basis points from 1/1/03 through 12/31/16 and, effective 1/1/2017, 250 basis points). The LTV SMA Wrap Composite performance consists of money-weighted, time-weighted returns and it includes the reinvestment of all dividends and other earnings. The inception date of the composite is December 2002; however, the composite was created in January 2013. This composite has been managed in a similar manner to the LTV ERISA Composite which ended in December of 2019. The LTV SMA Wrap Composite does not represent all of Reaves’ assets under management.

8 The dividend growth rate is for the 24 companies held in the portfolio as of 12/31/20 -- the portfolio did not necessarily own these stocks for all of 2020. The number of securities excludes two ETFs used temporarily for tax harvesting purposes. See previous blog, posted on January 21, 2021.

9 “For 2020, the index set a record payment of $58.28 per share, slightly up from the prior record of 2019's $58.24.” https://www.prnewswire.com/news-releases/sp-dow-jones-indices-reports-us-indicated-dividend-payments-increased-9-5-billion-in-q4-2020--a-reversal-from-q3s-2-3-billion-decline-301202077.html#:~:text=All%20Products-,S%26P%20Dow%20Jones%20Indices%20Reports%20U.S.%20Indicated%20Dividend%20Payments%20Increased,%2412.0%20billion%20in%20Q4%202019; January 6, 2021

Past results do not guarantee future performance. Further, the investment return and principal value of an investment will fluctuate; thus, investor’s equity, when liquidated, may be worth more or less than the original cost. This document provides only impersonal advice and/or statistical data and is not intended to meet objectives or suitability requirements of any specific individual or account.
All investments involve risk, including loss of principal.
All data is presented in U.S. dollars.
Cash is cash and cash equivalents.
An investor cannot invest directly in an index. 
Important Tax Information:
 Reaves Asset Management and its employees are not in the business of providing tax or legal advice to taxpayers. Any such taxpayer should seek advice based on the taxpayer’s own individual circumstances from an independent tax adviser.
Fees: Net performance reflects the deduction of advisory fees which are described in detail in our Form ADV Part 2A.
Please contact your financial professional, or click the following links, for a copy of Reaves’ Form ADV Part 2A and Form CRS .” Additional information about Reaves may be found on our website:  www.reavesam.com.
2021 © Reaves Asset Management (W. H. Reaves & Co., Inc.)

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