Safety in the Stock Market Is Getting Expensive
August 14 2019 - 1:16PM
Dow Jones News
By Michael Wursthorn
Yields on the 10-year Treasury note fell below two-year yields
for the first time since 2007 on Wednesday, sparking more than 2%
declines in the S&P 500 and Dow Jones Industrial Average and
sending investors toward safe-haven stocks.
Shares of utilities broadly rose 0.2% Wednesday morning, while a
handful of real-estate and consumer-staple stocks notched small
gains after investors got one of the strongest signals yet a
recession could be imminent. Those companies have long been viewed
as ports in a storm since they are considered reliable profit
generators that offer a guaranteed stream of income in the form of
dividends.
But if the economy truly falters, investors may find those
stocks provide little cover, some analysts said.
"Their earnings stability has fallen off dramatically," said
Brian Belski, chief investment strategist at BMO Capital Markets.
"Are millennials eating Cheerios or using their cellphone? They're
eating less of those and they're on Google looking how to get
somewhere."
Take consumer staples. Earnings growth among Procter &
Gamble Co., Coca-Cola Co., Colgate-Palmolive Co., General Mills
Inc. and Mondelez International Inc. has become more volatile over
the past five years, as those companies cope with pricing pressures
weighing on profit margins and waning demand for some of their
products, said Mr. Belski.
Still those stocks are up double-digit percentage points despite
some reporting lackluster results. General Mills, for example,
missed analysts' sales estimates and earnings, before adjustments,
and also fell short of forecasts due in part to sluggish sales of
its snack bars and cereals. Still, shares are up nearly 19% this
year, as investors have gravitated toward traditionally safe
stocks.
The gains across those sectors pushed price-to-earnings ratios,
a useful tool for measuring valuations, well above where the
broader S&P 500 index trades. Consumer staples, utilities and
real-estate stocks all carry forward-looking price-to-earnings
ratios of at least 19 times, versus the S&P 500's 16.7 times,
near their highest valuations since early 2018.
Mr. Belski said investors may be better off defining a new group
of safety stocks, including companies like Apple Inc. and Netflix
Inc., both of which have shown greater earnings stability in recent
years.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
August 14, 2019 14:01 ET (18:01 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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