Author: Split Rock Private Trading
Covestor model: Equity Rotation
Disclosures: Long PG, KO, CL, GIS, KMB, WMT, WM
Identifying which phase of the economic cycle we are in – a period of economic expansion or economic contraction – can help investors in their effort to understand where markets may be headed. Historically, the economic cycle contains four phases: early, mid, late, and recession. We believe that we are currently in a mid to late cycle phase.
So why consumer staples, why now? One of the reasons we’re so positive on consumer staple companies is their defensive characteristics. Consumer staples currently make up around 47% of our Equity Rotation model.
How well have consumer staples held up during past bear markets? Over the past ten years we have experienced two very significant bear markets. Consumer staples (as measured by the Consumer Staples Select Sect. SPDR (NYSE: XLP)) outperformed the S&P 500 during that ten year period. What about our latest recession? Officially the National Bureau of Economic Research states that our most recent recession began in December 2007 and lasted 18 months until June 2009. If you compare the consumer staples ETF XLP to the S&P 500 during that period you will see that consumer staples also outperformed in this timeframe.
Stocks bottomed out in early March of 2009 and have made a very nice run since then. XLP lagged the S&P 500 during this period, as consumer staples may not perform quite as well when markets are zooming.
We believe consumer staples companies will continue to perform well, even in down markets. No matter what our economy is doing, there are certain items that people will not live without. People are still going to buy soap (The Procter & Gamble Company (NYSE: PG)), pop (The Coca-Cola Company (NYSE: KO)), toothpaste (Colgate-Palmolive Company (NYSE: CL)), cereal (General Mills, Inc. (NYSE: GIS)), and diapers (Kimberly Clark Corp (NYSE: KMB)); they are still going to go to Wal-Mart (Wal-Mart Stores, Inc. (NYSE: WMT)) for products like toilet paper, shampoo, and deodorant; and people are still going to need to dispose of their trash (Waste Management, Inc. (NYSE: WM)).
Sources:
XLP price data from Google Finance: bit.ly/qROYEd
