Investments

The best minds on Wall Street generally agree that global markets will continue to be unsettled throughout 2008. The ongoing uncertainty has naturally made some investors skittish. But there's a flip side to market volatility: Just as many of the market leaders of the past several years have slipped, a new group is emerging. "Leaders going into a period of increased financial market volatility simply have not been the leaders coming out," says Richard Bernstein, Chief Investment Strategist at Merrill Lynch, (See "History of Recent Leadership Changes" at bottom of page.) The new hierarchy that's surfacing provides significant opportunity to thoughtful investors as they look to rebalance their portfolios.

Volatility signifies change, not weakness
So what's behind the market upheaval? In part, it's the tectonic shifts in worldwide economic conditions. "Volatility is predominantly a symptom of change in the underlying global economies," says Bernstein. "And the biggest change is the tightening of credit markets around the globe.

With credit troubles roiling world markets and conventional wisdom pointing to the safety of bonds, some investors are wondering whether to stick with stocks at all — and if so, which ones. In such uncertain times, one trusted strategy is to invest in defensive sectors: the industries that supply the goods and services consumers need every day, even in recessions.

These industries include retail drug and grocery stores, makers of essential household products and popular beverages, and pharmaceuticals. "Health care and consumer-staples stocks traditionally outperform the broader market during economic slowdowns and recession," says Brian Belski, U.S. Sector Strategist for Merrill Lynch.

Defensive stocks, which outperformed in 2007, are expected to remain among the market leaders this year, according to Richard Bernstein, Merrill Lynch's Chief Investment Strategist, who expects the economy to shrink throughout much of 2008. In that eventuality, many companies will suffer earnings declines, and investors will gravitate to defensive stocks with steady earnings, pushing up their prices.

Many investors look beyond the bottom line in choosing their stocks. They try to put their money where it will support clean energy and reflect their concern for the environment — and still turn a profit. But until recently, green-minded investors who wanted to add energy stocks to their portfolios often had to choose between ideals and performance. However, wind, solar and biofuel technologies, among others, have begun to hit their stride as various market forces coalesce to boost the long-term viability of alternative fuels. "The entire sector is up on average 60% from the start of 2007," says Asari Efiong, Vice President of Renewable Energy Research for Merrill Lynch, who notes that this strong performance came even amid concerns of a U.S. recession and global slowdown. "The theme has gone mainstream this year," she adds. ''Investors really can’t afford not to have some exposure to the sector."

The regulatory and market changes over the past 10 years suggest that the trend will continue up.