I'll admit it. Despite my skeptical view of the market, it's absolutely been on fire lately. As fears that Greece would default in the near future subsided, the market forgot its troubles and surged upward, booking a 5.9% gain from June 15 to yesterday's close.
While investors love watching their holdings surge so much in so short a timeframe, I think this recent run-up speaks more to investors' ability to tune out market fundamentals. If the macroeconomic picture sours, Fools will want to examine the defensive stocks I've profiled below to reinforce their portfolios.
Not out of the woods yet
The recent rally occurred largely because the most risky Eurozone member, Greece, managed to secure additional bailout funds from the European Central Bank and the IMF. The market took a temporary hiatus from its worrying ways, but potential problems surfaced again just yesterday, as credit rating agency Moody's downgraded Portugal's debt to junk status.
Although a Eurozone currency crisis could wallop the global economy with recession and deflation, the far greater likelihood of additional bailouts and austerity to prevent such a catastrophe from occurring present equally real risks for investors. Ireland, Spain, and Italy also occupy shaky fiscal ground, and the danger they pose seems greater than the market's willing to acknowledge.
Behind the silk curtain
Concerns also abound on the other side of the globe. China raised its benchmark interest rate yesterday in an effort to stave off rising inflation. While preempting inflation with rate hikes can help maintain economic stability, China's decision to hit the brakes also slows the economy in a key area driving global growth.
This news comes as skepticism mounts regarding the strength of the Chinese economy. Concerns about transparency within China have reached new heights, as accounting irregularities come to light and auditors, investors, and the SEC begin raising issues about the integrity of reporting standards and internal controls at publicly traded Chinese firms such as Longtop Financial (NYSE: LFT), Wonder Auto Technology (Nasdaq: WATG), and Duoyuan Global Water (NYSE: DGW). To make matters even more concerning, Moody's yesterday also issued a release yesterday warning of possible understating of Chinese bank debt. Again, as with Europe, this in and of itself doesn't mean the world will come crashing down. However, it does highlight the substantial and very real risks facing the global economy going forward.
What's a Fool to do?
In two words: Tread carefully. If trouble arises on either continent -- hopefully not both -- large, stable companies with strong balance sheets should stand the best chances of weathering serious economic storms. If these fears do grow more real, avoiding investments with substantial exposure to trouble areas should also fare better.
|
Company |
Market Capitalization (in billions) |
Debt-to-Equity Ratio |
Price-to-Earnings Ratio |
Dividend Yield |
|---|---|---|---|---|
| Travelers (NYSE: TRV) | $24.5 | 26% | 8.0 | 2.8% |
| Eli Lilly (NYSE: LLY) | $43.2 | 48% | 8.6 | 5.3% |
| General Dynamics (NYSE: GD) | $27.9 | 23% | 10.8 | 2.5% |
Data from Capital IQ, a division of Standard & Poor's.
These companies have size, conservative financing, cheap valuations, and strong payouts -- some of the most important factors for enduring economic woes.
Travelers generates the bulk of its revenue selling business and personal insurance within the United States. Eli Lilly also does the majority of its business domestically, sells a somewhat inelastic product, and has rock-solid dividend. This should help cushion declines in the stock price in the event of a macroeconomic disaster actually does occur. General Dynamics operates in a sector well-insulated from the potential pains of the global economy. Because it derives the overriding majority of its revenue from contracts with the U.S. government, its earnings should also hold up well in the event of a global turmoil.
Even if the global investing environment sours significantly, these stocks should still deliver returns for their owners.
Before seeking returns anywhere, intelligent investors should keep Warren Buffett's No. 1 rule in mind: "Don't lose money." Although the concerns discussed here have yet to turn into full-on crises, they could still throw a wrench into the global economy's spokes.
If you want to learn more about opportunities to invest safely in this dangerous world, The Motley Fool recently compiled a free video report, "Watch This Before the Market Crashes," available free of charge. If you think the global economy could be in for a rude awakening, click here to access your free copy of this report.
