This time is different: Why T. Rowe Price says your defensive strategies may need a shakeup

It’s one thing to intellectually accept that short-term market volatility is a normal part of investing for potentially higher returns. Still, in the midst of turmoil, it’s hard not to worry that despite a pattern of rebounds from historic crashes, this time is going to be different.

Well, this time it is different — at least from market downturns in recent memory, according to T. Rowe Price money pros.

“From 2008 to 2020, managing downside risk in portfolios was managing the downside of growth rather than the upside in inflation. Today, we have several directions of risk, including high inflation, stagflation, and low growth,” writes T. Rowe Price’s Adam Marden, portfolio manager for macro and absolute return strategies and dynamic global bonds.

The outlook on defensive assets

Traditional defensive assets that outperform the broad market in an old-fashioned growth shock scenario — consumer staples, health care and utilities — are not a slam-dunk in this environment. Here are T. Rowe’s thought bubbles: 

• Consumer staples: “Consumer staples have the ability to provide defense in all environments. But the sector has historically needed to trade at a relatively cheap valuation to the overall market to benefit portfolios,” says Marden.
• Health care: “It’s a very defensive area relative to all asset classes as it doesn’t get hurt nearly as badly as Treasuries or other equity sectors by inflation,” says Marden. “However, regulatory issues add nuance to the sector and make strong fundamental analysis of individual health care companies essential.”
• Utilities: “Artificial intelligence (AI) power demands have led to a speculative valuation premium that became obvious in the AI‑related selling pressure when the market grappled with DeepSeek’s more efficient power intensity. This would cause utilities to lose some of their diversification benefits in an inflation‑driven sell‑off,” says Marden.
• Treasurys: “Long‑maturity Treasuries have also become much more volatile, taking away some of their diversification advantages,” says Arif Husain, CFA, head of fixed income and chief investment officer.

And what about the historic “safe-haven” asset: The good old U.S. dollar?

Here, too, T. Rowe has some caveats. Says Marden:

“It’s important to note that the dollar’s consistently defensive performance has been during a U.S. exceptionalism time period. If that narrative flips, the U.S. dollar’s defensive characteristics could erode quickly as investor demand for other currencies grows.”

What should investors do now?

T. Rowe cites several ways for investors to hedge risk exposure (via low-volatility stocks) and limit downside (using options strategies). And then there’s the ultimate “safe” short-term asset: cash. 

In 2020, banks were paying near-zero interest rates on cash. This time it’s different:

“Cash is no longer trash!” says T. Rowe Price’s Sébastien Page, CFA, chief investment officer and head of global multi‑asset. “Cash/cash equivalents is a defensive asset simply because it offers relatively attractive yield and high liquidity. FOMO pain — in terms of potential upside in risk assets — is lessened when you are getting an attractive yield.”

Let your investing priorities — not your emotions — drive your defensive strategy:

• Maintain the spending power of your cash: These 10 low-risk investments for 2025, including high-yield savings accounts and short-term certificates of deposit (CDs), can help you preserve capital and maintain a flow of interest income.
• Lower your exposure to the riskiest sectors: Investing in defensive ETFs — baskets of stocks in companies whose services are essential to everyday life — keeps you invested in equities while minimizing exposure to the most volatile sectors.
• Don’t lock in your losses too soon: It takes discipline to stay invested during turbulent times. Trying to time the market is one of the biggest threats to your long-term returns. Instead, channel your nervous energy into mastering the mindset of the most successful long-term investors. 

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.