I don’t think there is an expert out there who can deny that the global economic situation is tenuous at best. Depending on whom you ask, the average consumers’ fiscal health outlook for the next 12 months may range from bleak to perhaps hopeful. You would be hard pressed to find an informed economist, investor, professional or politian that sees an explosion of growth in the next year without some struggle.
By the numbers, at least here in the U.S., the BLS employment reports have been showing a decline in the number of jobs added over the past 3 months. Last year, those same months of the year actually saw a systematic increase in jobs with May being the height of jobs growth and then falling off a cliff, eventually sending the S&P 500 down 300 points or almost 30% by the lows in August. Today’s abysmal BLS report punctuates this trend of decline and if May was the best month in 2011, I am scared to see what June 2012 holds.
While manufacturing PMI came in higher than expectations this week, the average readings this year is still lower than 2004-2007 and 2009-2011. Non-manufacturing PMI looks the same.
The housing market continues to struggle in both price and the rate of sales. These and other indicators here and abroad commonly point to a “mixed” outlook and anemic recovery at best.
Even with all this, the major indices are close to 4 year highs. Is the party over? If so, what should you be doing in your portfolio to prepare.
Our New Problem
History has shown that in tough times, you can move money into to consumer staple stocks, bonds, money markets, etc to decrease your portfolio’s volatility and preserve capital.
While those suggestions are still viable, there are several potential issues. Bonds (U.S. Treasuries) are probably the worst place to be now. The FED (along with the masses) have been scooping up these notes since the crisis, driving prices up and yields down. If things turn out to be “OK” and the FED takes no further action or even raises rates, bond prices may tumble and holders of bonds will then have a poor yield on a bond they overpaid for and may incur principal losses as well.
If inflation continues to tick up, money market rates may do the same, but being that the national average is less than 0.5%, the interest rate is far short of the target of 2% inflation. This means your principal, while safe, may have inflation risk.
If things do get better, consumer staple stocks may not give you the capital appreciation you desire as investors flock to the “sexier” growth stocks out there. While consumer staples or traditional dividend earners are not a bad place to look, but let’s examine three stocks in three sectors that may be alternatives for the basic staple companies like Johnson and Johnson (JNJ - Analyst Report) or Clorox (CLX - Analyst Report).
When Americans get nervous about the economy (and stability) of global economies, we tend to change our spending habits. Recently those habits have included buying firearms. Smith & Wesson, Sturm Ruger and others have seen demand growing almost constantly since 2008, sparked by economic uncertainty and worries that Barack Obama might seek to reduce gun rights in America.
Sturm, Ruger & Co., Inc. opened for business back in 1949. RGR is principally engaged in the design, manufacture, and sale of firearms and precision metal investment castings. They are the only U.S. firearms manufacturer which offers products in all four industry categories.
Last month RGR announced that it had received orders for more than 1 million units in the first quarter alone; the company noted that “despite efforts to increase production rates, the incoming order rate exceeds our capacity to rapidly fulfill these orders.” What’s more is that RGR still remains relatively valuable at 20 times forward earnings. While this number may seem relatively elevated, consider the fact that RGR has beat analyst estimates 7 quarters in a row and has averaged an almost 27% postive earnings surprise over the past year.
Industry experts see the firearms growth continuing, quality manufacturers like RGR will most likely continue to benefit. RGR is a Zacks Rank 1 Strong Buy and currently yields a 1.55% dividend.
At a recent investor conference, I was reminded that beer has shape world cultures throughout the ages. Beer is the 3rd most consumed beverage in the world, next to water and tea. Its roots can be traced back to 9500 BC…
In tough times, many turn to beer to reduce stress and bring a modicum of relief to a tough day. Arguably, beer also serves as a social bond for friends and community members to network and get through those hurdles. At home and in pubs around the world, beer brings society together and maybe makes things just a little bit better.
In good times, people still enjoy a good brew, but perhaps with different motivation for doing so. Maybe with a couple more bucks in your pocket, you may even go for that premium, hand-crafted malted brew you have been curious about. Like it or not beer is here to stay.
Think outside the box when you are looking for defensive stocks. Use your logic and experience to target companies that will benefit in good times, but also not do so poorly in bad times. The “Stay-cation” is a popular term coined during the last recession.
With limited funds, poor job prospects and high petrol prices, many consumers either went the cinema which helped companies like Regal Cinema (RGC) or they watched at home, which was beneficial to companies like Coinstar/Redbox (CSTR).
Hopefully this got you thinking about alternatives for a shaky economy. Look at your habits, what do you do differently at home when times get tough?
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