By John Wasik
CHICAGO, June 4 To maintain your mettle as an
investor in the face of mixed economic signals, you have to be
able to be able to do what F. Scott Fitzgerald said was the test
of first-rate intelligence: be able to hold two opposing ideas
in your mind and still function.
On one hand, it's counter-intuitive to buy into a decline.
It doesn't feel right, although you will get better prices on
quality stocks. The standard approach, which I suspect most
investors choose, is to retreat to the sidelines.
If you can take the risk, keep investing in solid companies.
If you need growth in your portfolio, don't pull out; embrace
the long-term prospects of owning companies that produce
consistent profits and dividends. A good place to look for
profits are U.S. consumer staples and discretionary stocks.
These stocks are among the most profitable in the world, have
paid robust dividends and continue to benefit from the
snail-like U.S. recovery that may be "de-coupling" from Europe
and not moving in lockstep.
How can this be possible in the face of U.S. consumer
confidence falling to its lowest level in four months in May,
fears of a global slowdown roiling stocks worldwide and pathetic
My theory is based on this: Slowly recovering U.S. home
prices signal that the dismal housing recession may have
bottomed out. When Americans absorb that reality, they will
start to buy homes, cars, appliances and other consumer goods.
And with the easing of oil and gasoline prices, more money will
be spent on these other items. We've seen some of this activity
recently in May retail sales, which were stronger than expected.
Corporate profits have already reflected the rebound,
although employers have been extremely reluctant to hire based
on the short-term anxieties in Europe and slack overall demand.
Dividends, based on profits, are also robust.
S&P Capital IQ noted in its May 30 sector outlooks report
that this year "estimated S&P 500 dividend growth will be 18.4
percent." Investors hungry for yield have embraced dividend
payers, spurring a 10.8 percent and 4 percent year-to-date
increase in consumer discretionary and staples, respectively
(through May 25).
There's also a backstop to this optimism. S&P Capital IQ,
among other market observers, is a firm believer in the
"Bernanke put," or the notion that the Federal Reserve will
continue to support the U.S. economy through "quantitative
easing" of keeping short-term rates low if growth slows again.
One way of tracking consumer discretionary stocks - who make
products you do not need but will buy with extra cash - is
through exchange-traded funds like the Vanguard Consumer
Discretionary ETF. The fund owns more than 300 companies
like McDonald's, Amazon.com, Comcast,
Home Depot and Starbucks. These are pure
consumer liquidity plays.
When the job market stabilizes even more and housing prices
start to show life again, a wealth effect exhorts Americans to
spend again on non-essential items. A good alternative to the
Vanguard fund is the Consumer Discretionary SPDR.
Consumer staples, in contrast, tend to be less-glamorous
items that people tend to still buy even during economic
downturns. There's a little overlap with discretionary stocks,
but it's unlikely that consumers cut back on things like
tissues, toothpaste, drugs or discount stores when times are
tight. Household goods, packaged foods, soft drinks and tobacco
products tend to dominate this sector. When the general market
swoons, it's also a good time to buy.
Not surprisingly, consumer staples are sold by some of the
oldest and strongest companies in the U.S. such as
Colgate-Palmolive, Procter & Gamble and Kraft
Foods. You can find them packaged in ETFs like the
Vanguard Consumer Staples ETF or the First Trust
Consumer Staples AlphaDEX ETF.
There's an even better argument for a broad-based approach,
because if you chase individual sectors to find growth you face
additional risk -- you can often guess wrong. The SPDR Dow Jones
Total Market ETF will virtually cover every U.S. stock.
Of course, there's always room in my theory to be wrong.
Housing will take a long time to recover. The job market is
severely lagging when it should be in a healthy rebound. And
there are always surprises when you least expect them in an