What happened
Shares of Clorox (CLX -0.10%) rose 14.7% this week, as the consumer-staples stock appeared to benefit from a decline in long-term interest rates.
Clorox, which could be considered a pandemic stock, has seen a sell-off this year as inflation has risen. That ate into costs, while demand moderated as the pandemic-era boom in cleaning products ebbed. Additionally, a rise in long-term interest rates hurt the stock somewhat, since low-growth, dividend-paying consumer staples stocks are seen as bond proxies by many investors.
Ironically, since the Fed hiked rates aggressively two weeks ago, anticipation of an economic slowdown is actually helping consumer-staples stocks like Clorox this week.
So what
Ever since the Federal Reserve hiked interest rates by 75 basis points on June 15, investors began pricing in a slowdown in inflation, and potentially a recession. While the Fed controls the short end of the yield curve, long-term interest rates peaked at that time, and have been falling ever since. Long-term rates tend to track long-run expectations of inflation, and it appears that the recent hawkishness by the Fed has arrested inflation expectations, at least for now. Since June 14, the 10-year Treasury Bond yield has fallen from 3.48% to 3.12%, which is a fairly large decline in a short amount of time.
Most consumer-staples stocks aren't known for their runaway growth, but they do usually offer consistency in good times and bad, and pay out hefty dividends. Clorox currently yields about 3.7% and trades at about 26 times next year's earnings estimates. However, it's only a low-single-digit grower. So, like many other stocks in its sector, Clorox looks a little better than a bond, but with a little more risk. Therefore, when long-term bond yields go down, consumer-staples stocks like Clorox tend to go up.
Now what
Clorox also has some self-improvement going on in its business. When demand for its cleaning products surged during the pandemic, the company had to use expensive outside contract manufacturers. Now that demand has normalized, its gross margins have plummeted. Clorox's product set is facing quite difficult comparisons broadly, as it's a leader not only in cleaning, but also in grilling and trash bags. With people now venturing out of their homes since the widespread distribution of vaccines, these products are being used less than last year.
Current CEO Linda Rendle is working on exiting those expensive outside contracts, as well as on raising prices and cutting costs elsewhere in the business. Clorox is back trading below where it was prior to the pandemic, when its stock surged. So it may be a reasonable consumer-staples stock for your portfolio today, if you're near retirement and worried about a recession.
However, other than being a defensive yield play for retirees, Clorox doesn't appear to have that much upside, unless long-term bond yields plummet further to pandemic-era levels.
