Economic Recovery? Stocks Say No

Consumer staples are more popular now than at any time since 2003.

The International Monetary Fund's decision to cut its economic outlook for the world won't have been much of a surprise to those who follow stock markets closely. Investors have never been this defensive since at least 2003, when Bloomberg started tracking global cyclical and noncyclical shares. 

In Defensive Mode

The gap between an index that tracks cyclical and noncyclical stocks reached a record on July 8

Source: Bloomberg

Equity investors tend to move into noncyclical consumer stocks when they expect an economic downturn. The rationale is that no matter how poor the outlook for jobs, there are certain things that people just don't get by without, such as Johnson & Johnson soaps and Nestle milk. Companies that produce those goods therefore outperform when the economy is in a funk. By piling into those equities, investors are saying that no matter how much stimulus central banks throw at the world, times are only getting tougher.

Could investors be a bit depressed, and too tempted to see bad news in economic numbers? One can hope.

Unfortunately for the world outlook, equity fund managers have been pretty good at forecasting the direction of global growth. Since 2003, they piled into cyclical stocks ahead of a takeoff and went defensive before a slump. 

Crystal Ball

Movements to and from defensive stocks have been good predictors of economic growth

Sources: Bloomberg; World Bank

* Premium refers to higher (lower) forward price-to-earnings ratio for noncyclical over cyclical indexes.

The message is just as clear this time. If you trust stock investors, apologies to the IMF economists who just revised their forecasts -- they might have to do it again. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Christopher Langner in Singapore at

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    Paul Sillitoe at

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