Is it time to shift out of defensive stocks?

CHICAGO (AP) — It’s a truism from Investing 101. When the economy is bad, seek refuge in stocks of companies that offer stuff people don’t cut back on: deodorant, toilet paper, health care and the like.

Such stocks have in fact widely outperformed the market during Wall Street’s nosedive, even though they proved far from immune from damage.

But now it may be time to consider playing less defense within your portfolio.

Certainly a more aggressive approach would have paid off in recent weeks.

After hitting a nearly 12-year low March 9, the Standard & Poor’s 500 index rocketed up 27 percent in a month, led by technology and financial stocks. That was more than double the 12 percent gain of the Consumer Staples Select Sector, an exchange-traded fund that invests in such typically defensive consumer stocks as Procter & Gamble Co., Coca-Cola Inc. and Colgate-Palmolive Co.

Does that mean it’s time to ditch the focus on recession-resistant stocks, or is it better to remain cautious until employment begins to level off and there are clearer signs of whether the stimulus is taking effect?

When assessing whether you’re ready to introduce more risk, it’s important to understand how the market performs historically. For instance, because defensive stocks generally underperform in a recovery, investors who either sit tight with conservative portfolios or tiptoe back into the market by buying “safe” stocks might be making the wrong moves.

“There’s a danger [with safe moves] from the standpoint that you could buy stocks that don’t catch most of the rebound,” said David Goerz, chief investment officer of HighMark Capital Management in San Francisco. “If you don’t consistently rebalance, you miss out on the recovery and you can actually end up well behind as we come out of this.”

In order to best position yourself to participate in a stock recovery, it’s better to buy cyclical stocks such as tech, manufacturing and other industries that rely on economic growth as the global recession moves closer to an end.

Barclays Wealth, the wealth-management arm of British bank Barclays, recently began recommending that clients begin dialing up risk accordingly.

“Our basic advice is be defensive by having more bonds or more cash and use your small stock portfolio to play offense,” said Aaron Gurwitz, the firm’s New York-based head of global investment strategy. He recommended going light on consumer staples and other defensive stocks while looking more for ETFs and stocks likelier to benefit from a recovery.

But others believe it’s too early to make more aggressive moves. After all, while some economists have publicly predicted the recession will end in the third quarter, the economy remains vulnerable, and a return to boom times is nowhere on the horizon.

Though they won’t lead the pack in a recovery, Tom McManus, chief investment officer of St. Louis-based Wachovia Securities, thinks consumer staples and health-care companies with strong balance sheets are still sound buys at current market prices.

“There’s no shame in underperforming in an up market as long as you’re making a reasonable amount of money,” he said. “I don’t feel comfortable owning those more cyclical companies if there’s a risk that the economy continues to move sideways for a year or more.”