How to Profit From the "New Normal"

For investors, it looks like pessimism is the new black -- the must-have accessory of the season. Despite news that the economy is stabilizing and that job losses are diminishing, scores of Americans continue to play the Grinch when it comes to the stock market's prospects.

After being caught largely unaware by the recent financial crisis, gun-shy investors have become wary of this year's market rally and seem to expect another correction in the near future. And some of the smartest minds in the business appear to agree with them.

The best offense is a good defense
Investors have good reasons for being suspicious of the market's comeback. So far, the rally has been largely concentrated in lower-quality sectors and securities -- the very areas of the market that got knocked for a loop last fall at the apex of the financial crisis. Stable companies with solid fundamentals and strong balance sheets haven't participated in the market run-up nearly as much. And practically no one is predicting that a period of robust growth is in store for the U.S. economy. As a result, many folks are getting defensive and hoping to ride out the expected period of subpar growth ahead of us.

Fixed-income master Bill Gross is among those sounding the alarm to be defensive in the current environment. In a recent letter to fundholders, he argues that the "New Normal" is a world in which lower returns are par for the course. Slower growth and greater government regulation will restrain corporate profits and put a damper on stock returns. Gross predicts that even high-growth companies will start to act more like utilities, so investors should think about actually buying utility stocks, which should hold up better in slow-growth times.

Slow and steady
So is this really the best that investors can do? Buy boring utilities and hope to eke out a small, marginal return for the next few years? Well, don't be so quick to knock utilities. While they certainly won't provide the growth and excitement of high-flying tech names like Apple (NASDAQ:AAPL), utilities typically do provide one benefit that tech stocks don't -- dividends. In a low-growth environment, steady but high-yielding stocks may come back into vogue. Utilities certainly haven't been big winners in this year's rally, which means there may be more untapped upside in that sector than in many others.

For instance, look at the good values that some utility names offer right now, along with their healthy dividend payouts:

Source: Yahoo! Finance.

In my opinion, all of these particular utility names also have some decent growth prospects ahead of them as well, which you can't say for many utility companies. That means that not only will you get defensive staying power and a hefty dividend yield, but you'll have the opportunity for meaningful future growth as well!

All is not lost
Of course, even if our economy drags its feet for the next couple of years, that's not to say there won't be pockets of greater opportunity out there. One area that I'm expecting good things from is health care.

It remains to be seen whether Congress will pass any form of health-care reform, but even if the current effort fails, this sector is ripe for future attempts at reform, which could be a tremendous boost for health-care stocks. But to get the greatest bang for your buck, you might want to look downstream a bit at mid-sized health-care names like Alexion Pharmaceuticals (NASDAQ:ALXN) and medical-equipment distributor Henry Schein (NASDAQ:HSIC). Firms like these are likely to have greater room for reform-fueled growth than many bigger name health-care plays like Johnson & Johnson (NYSE:JNJ).

Lastly, it's important to remember that the greatest growth prospects in the world over the next decade are likely to come from beyond our border. So don't forget to dust off your passport and go in search of some foreign names for your portfolio -- especially from emerging markets. This spicy sector will serve up some volatility along the way, so be prepared for a wild ride. However, longer-term results here should help offset the anemic growth the U.S. is likely to encounter in the years to come.

No one knows exactly what is around the corner for our economy, but we can be pretty sure that a return to heady, late 1990s-style growth is not it. Investors may want to step up their portfolio's defenses, but at the same time, shouldn't totally give up on growth. A well-balanced and well-diversified range of holdings is most likely to achieve success even if Bill Gross's "New Normal" proves to be reality.