Hunkering Down Against a Bear

09/11/2007 12:00 am EST

Focus: MARKETS

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

Jim Lowell, editor of Jim Lowell’s Fidelity Investor and the Forbes ETF Advisor, finds some funds and ETFs he thinks could hold up well in a recession or bear market.

These days, it’s hard to ignore the rising hue and cry of the recessionistas (those who believe that a recession is not only inevitable but imminent). And while I wouldn’t rule out a recession in the next 18 to 24 months, I’d be surprised to find one knocking on our economy’s door inside the next 18 weeks (i.e., by year-end).

That doesn’t mean that we should blithely ignore the factors behind the threat which, even if they don’t trip our slowing but still growing economy into recession, could as easily send our market from correction (a loss of 10% or more) to crash (a loss of 20% or more).

The market hasn’t yet priced in (i.e., discounted from current price levels) an actual, as opposed to possible, weakening consumer. Add to that the fact that the housing crash’s toll on employment (from laid-off homebuilders to moping and moribund mortgage brokers) could itself dent the current rate and pace of consumer spending, and you’ve got the rationale for the recessionistas.

Today, we’re in “hurricane season” in real seasonal time and in market time. So, based on what we know today, here are my top next bear market/recession sector funds and exchange-traded funds (ETFs).

iShares Global Consumer Staples (NYSE: KXI) or Fidelity Select Consumer Staples (FDFAX). We own these necessary-goods sector funds because consumers aren’t about to stop eating, bathing, drinking any more than they’re about to stop shopping. Common holdings in top ten: Proctor & Gamble, Nestle SA, Altria Group, PepsiCo, Coca Cola, and CVS.

iShares Dow Jones Aerospace & Defense (NYSE: ITA) or Fidelity Select Defense and Aerospace Portfolio (FSDAX). The human condition tells us that war is constant, peace is intermittent. Common top ten holdings include: United Technologies, Boeing, Lockheed Martin, General Dynamics, Raytheon, Precision Castparts, and Rockwell Collins.

iShares Dow Jones US Medical Devices (NYSE: IHI) or Fidelity Select Medical Equipment & Systems (FSMEX). Necessary products, from pipelines to stents, make this a solid defensive field. Holdings in both funds’ top ten: Medtronic and St. Jude Medical.

iShares Dow Jones US Pharmaceuticals (NYSE: IHE) or Fidelity Select Pharmaceuticals (FPHAX)—Pharmas remain a relative value play in the growth camp, despite posting fairly solid returns so far this year. In particular, it’s the major pharmaceuticals that look like downright values relative to the market. Holdings in both funds’ top ten include Johnson & Johnson, Merck, Abbott Labs, Bristol-Myers Squibb, Wyeth, Schering-Plough, and Allergan.

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