Readers know that I’m intrigued by the prospects for consumer staples stocks. While we don’t own anything in the space currently, this is largely because the area has tended to underperform during cyclical recoveries in the economy. Historically, the space is a safety play or defensive sector of the market. The view is that people use the same amount of toilet paper and toothpaste during recessions as they do during good times. As a result, the stocks tend to outperform during downturns as their earnings hold up on a relative basis, but tend to lag during upturns when other areas of the economy start to grow faster.
So far, this has been the case during this cycle. Consumer staples stocks, along with health care issues, have not participated much, if at all, in the recent rally. As a result, the valuations on the group are near all time lows. Of course, I’ve also learned that being cheap or expensive often doesn’t mean much for stock prices until you get a fundamental catalyst to spark a change.
I’m thinking that the catalyst in this case could be the weakening dollar. However, I don’t view a weakening dollar as a sign of U.S. weakness as much as a sign that many areas of the rest of the world may be stronger. Certainly, the U.S. government has pumped a great deal of money into the system, but so have countries throughout the world. On a relative basis, I’m thinking other currencies might rise.
The chart shown below just came across my desk a few days ago and shows actual correlations that may verify what I am thinking intuitively. Of course, everyone knows that staples underperform in recoveries, but perhaps the dollar weakness play might make this time around different. Even if I’m wrong, the stocks may have limited downside from here, so the only issue may be one of timing in a relative performance context.
I haven’t moved on the idea yet, but would be curious to hear your thoughts. Let me know by email or by sharing your thoughts with the rest of the blog’s readers by posting your own comment.
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