For decades, investors have sought "defensive" equities—stocks that hold up during market downturns. Traditional thinking favors stable, bond-like sectors like consumer staples and healthcare. However, our research across eight major market crashes since 1970 reveals a different pattern: valuation, not just stability, is the key to true defensiveness.
As shown in the chart below, when popular market segments become overvalued—whether the Nifty Fifty stocks in the 1970s, dot-com growth stocks in 2000, or small value stocks before 2008—they tend to suffer the steepest declines. Meanwhile, out-of-favor areas, often trading at lower valuations, have delivered better downside protection. This suggests that a resilient portfolio isn’t just about owning stable companies—it’s about avoiding the most expensive parts of the market.
Today, US large-cap stocks, particularly in technology, are highly favored, while bonds, small-cap value, and non-US equities remain overlooked. Investors who resist chasing past winners and instead focus on valuation may find better protection in the next downturn. As always, the best defense is not just quality—but quality at the right price.
You can also listen to a discussion of our full research paper. (Note: This podcast has been generated using artificial intelligence and does not represent an endorsement of Greenline Partners. The voices and perspectives are not a reflection of members of the firm.)
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