The signs that the economy is slowing down are starting to become more frequent. In that context, it's time for investors to consider how their portfolio will fare in this environment, and which stocks stand to benefit in a tougher economic climate.
Is a "double-dip" in the cards?
When the yield curve inverts (i.e., when long-term interest rates drop below short-term rates), it's a leading indicator of a recession. Since it achieved a one-year high of 3.75% in February, the 10-year Treasury yield has dropped to just above 3% -- despite the imminent end of the Federal Reserve's bond-buying program. With short-term interest rates at zero, there is no way the yield curve is going to invert, but it is flattening and that could indicate the bond market is anticipating a significant slowdown in the economy, or another round of bond buying by the Fed, QE3 (which would probably occur if Chairman Ben Bernanke believes the recovery has stalled).
Cyclicals are out, defensives are in
On Wednesday, I pointed out that the second quarter has witnessed investors rotating out of cyclical stocks (energy, materials, industrials) into defensive ones (consumer staples, health care, utilities). That rotation suggests the stock market believes we've at the top of the business cycle. The following table contains five defensive stocks that haven't participated in that trend so far, and that could yet benefit from it:
Q2 % Return
|Boston Scientific (NYSE: BSX )||(3%)||19.7|
|Clorox (NYSE: CLX )||(1%)||17.3|
|Hershey (NYSE: HSY )||0%||18.8|
|Quest Diagnostics (NYSE: DGX )||(1%)||12.8|
|Verizon (NYSE: VZ )||(5%)||15.8|
Source: Capital IQ, a division of Standard & Poor's.
Of these five stocks, the ones that look most interesting to me are Quest Diagnostics, based on the combination of low valuation and a high-quality business. Alternatively, investors may want to consider the Healthcare Select Sector SPDR ETF (NYSE: XLV ) or the Consumer Staples Select Sector SODR ETF (NYSE: XLP ) .