The best-performing US stocks right now are ones that usually do well when the economy isn’t, makers of everything from household cleaning products to food. It’s yet another black cloud for investors fretting over a growth slowdown.
Consumer staples stocks in the Standard & Poor’s 500 Index — which include Procter & Gamble and Coca-Cola — have outpaced the benchmark gauge for seven straight weeks, the longest stretch since November 2007, when the US economy was on the brink of its last recession.
Valuations have also jumped, with the group’s price-earnings ratio 14% above the five- year average.
“Liquidity is coming out of the market, risk is being taken off the table,” said Walter Todd at Greenwood Capital Associates.
“It manifests itself across all those trades: buying utilities and staples, selling small-caps.
"This is clearly reflective of the uncertainty that exists about the economy.”
Staples and utility shares are the only groups that eked out gains in the S&P 500 over the last six months.
With the gauge tumbling 5.2% so far in 2016 amid fresh worries about China and an exodus from commodities, investors are gravitating to defensive industries whose earnings are less linked to economic growth.
Defensive groups were leaders during two of the last times US stocks tumbled into bear markets.
As the S&P 500 slumped 57% between October 2007 and March 2009, the three best-performing industries were staples, health-care and utilities stocks.
That was also true from March 2000 to September 2001, when the broader measure plunged 37%.
That utility shares have held up while investor unease is mounting reminds Greenwood’s Todd of late 2014.
Back then, power companies surged 15% in the final five months of the year.
They didn’t prove to be harbingers of a bear market or a recession.
The S&P 500 went on to reach an all- time high.
Utility companies like Teco Energy and AGL Resources have surged more than 33% in the last six months, helping the sector trade to the highest level versus the S&P 500 since September, the last time concerns over China spooked investors.
“It’s not all that surprising that some investors might find comfort in what has typically been more defensive positions,” said Stephen Wood at Russell Investments.
There are plenty of sceptics. Short bets on the utilities exchange traded fund have more than quadrupled.
Similarly, bearish wagers on the consumer-staples fund have tripled in the last two months.
“The markets are all over the place in terms of what’s attractive and what’s not attractive, and there are some pretty big gaps,” said Jason Pride at Glenmede.
“We’re taking a fairly active approach in US equities and perhaps even a bias toward the safer side of US equities.”
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