Photographer: Luke Sharrett/Bloomberg

It's Not a Sign of Economic Health When Soapmakers Lead S&P 500

  • Consumer staple stocks post longest outperformance since 2007
  • China worries, commodities rout bring back defensive trade

The best-performing U.S. 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 Co. and Coca-Cola Co. -- have outpaced the benchmark gauge for seven straight weeks, the longest stretch since November 2007, when the U.S. economy was on the brink of its last recession. Valuations have also jumped, with the group’s price-earnings ratio 14 percent above the five-year average, Bloomberg data show.

“Liquidity is coming out of the market, risk is being taken off the table,” said Walter Todd, who oversees about $1.1 billion as chief investment officer for Greenwood Capital Associates LLC in South Carolina. “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 percent 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. Shares of consumer-staples companies slipped 0.1 percent as of 9:34 a.m. in New York, while the utilities group gained 0.2 percent.

Defensive groups were leaders during two of the last times U.S. stocks tumbled into bear markets. As the S&P 500 slumped 57 percent 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 percent.

That utility shares have held up while investor unease is mounting reminds Greenwood’s Todd of late 2014. Back then, power companies surged 15 percent in the final five months of the year. They didn’t prove to be harbingers of a bear market or a recession. While the late-year rally helped the group become the market leader for the year, nearly all its gains were erased in the next eight months and the S&P 500 went on to reach an all-time high.

Utility companies like Teco Energy Inc. and AGL Resources Inc. have surged more than 33 percent 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.

“This is an environment in which for investment returns, every basis point counts,” said Stephen Wood, who helps manage $237 billion as chief market strategist for North America at Russell Investments in New York. “It’s not all that surprising that some investors might find comfort in what has typically been more defensive positions.”

An exchange-traded fund tracking utility shares lured $232 million on Dec. 11, the highest inflows in more than a year. Still, the ETF ended up seeing $907 million exit last quarter. Meanwhile, a consumer-staples ETF has lured almost $559 million since Oct. 1, data compiled by Bloomberg show.

There are plenty of skeptics. Short bets on the utilities ETF have more than quadrupled, jumping to 12.5 percent out of shares outstanding from 2.7 percent in October, according to data compiled by Bloomberg and research firm Markit Ltd. Similarly, bearish wagers on the consumer-staples fund have tripled in the last two months.

Investors are trying to regain footing after the worst start to a year for U.S. equities on record.

“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, the Philadelphia-based director of investment strategy at Glenmede, which oversees $30 billion. “We’re taking a fairly active approach in U.S. equities and perhaps even a bias toward the safer side of U.S. equities.”

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