2 defensive stocks to consider as market conditions turn more bearish

The stock market gave back most of its gains on stronger than expected inflation. In these difficult circumstances, investors should consider high-quality defensive products like Elevance Health (ELV) and Northrop Grumman (NOC).

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The stock market has now returned most of its 18% rise from the mid-June lows. The catalyst for the rise from mid-June was the possibility of a reversal in inflation figures, which would be the harbinger of the Fed's slowing in its rate hikes and the unwinding of the readings. extremes of short interest rates and bearish sentiment. A contributing factor was the resilience of corporate earnings and economic data despite some unfavorable conditions.

However, these conditions will become even more difficult after the latest inflation data will likely push rates higher and for a longer period. The Fed wants to see inflation come down significantly and sequentially before it considers easing its current hawkish stance. Based on July data and continued weakness in gasoline prices, freight rates and vehicle prices in August, some thought this might be happening.

These increases were more than offset by increases in other components. And, the Fed's preferred measure - core CPI - actually accelerated on a monthly basis. This means that the bullish tailwind from lower inflation is weakening, while the bearish headwind from a hawkish Fed is getting stronger. In these difficult conditions, here are 2 defensive stocks investors should consider:

Elevance Health (ELV)

ELV is a managed care company, providing medical benefits to approximately 44 million members. The company offers employer, individual and government coverage plans. It is also the largest single provider of Blue Cross Blue Shield branded coverage. This sector has also been particularly strong due to a low unemployment rate, which means that the company has seen strong growth in the number of enrollees.

In addition, the pandemic boosted its results, as fewer people were going to the doctor and undergoing procedures. Consequently, the company's payout ratio decreased. Many analysts were expecting an above-average reading as the economy normalized, but so far this has simply returned to pre-pandemic levels.

Another reason to appreciate managed care stocks is their pricing power, as healthcare spending tends to rise at a faster rate than inflation. Plus, they tend to be less affected by economic downturns. Currently, the company is growing through its Medicare Advantage plans and virtual care services.

Last year, the company achieved EPS of $25.98 and revenue of $136.9 billion. This year, analysts forecast EPS of $28.61 and revenue of $153.8 billion, increases of 10.1% and 12.3%, respectively. And, they see more growth in 2023: 13.3% EPS and 5.2% revenue.

With these attributes, it's no surprise that ELV has an overall rating of A, which translates to a strong buy rating in our POWR rating system. POWR ratings rate stocks on 118 different factors, each with its own weighting.

It also rates stocks based on selected factors to generate component scores to give investors more insight. ELV has a B for Sentiment because 14 of 17 Wall Street analysts covering the stock have a buy rating with a consensus price target implying a 13% upside. ELV is ranked #1 in the medical insurance and B-rated health insurance industry. For more top stocks in this industry, click here.

Northrop Grumman (NOC)

NOC is one of the largest aerospace and defense contractors in the world with a market capitalization of $71 billion. The Company operates through 4 segments: Aircraft Systems; defense systems; mission systems; and space systems. Its largest source of revenue is providing aircraft systems with tactical intelligence, weapons and mission systems for the military, radar, electro-optical/infrared and acoustic sensors.

NOC certainly meets the criteria for a defensive stock, as the company has consistently increased revenue, earnings, free cash flow and dividends. Over the past decade, each of these metrics has increased by 138%, 273%, 174%, and 207%. Indeed, defense spending continues to grow globally and NOC is one of the leading stocks in the sector.

Although it is a challenge...