—Cash. As the bear market unfolds, cash will continue to go from trash to king. Cash and short-term securities such as 3-month Treasury bills don’t return much and have negative inflation-adjusted returns but will provide much better returns than plunging stocks.
Many believe that spending on essentials such as utilities, consumer staples and health care is relatively immune from weakness in recessions. Therefore, their corporate earnings and stock prices should hold up. History says no. This chart lists the price changes in the S&P 500 and its components in the last four recessions. The only non-negative was the 24.2% rise in consumer staples in the 2000-2002 bear market. As shown in the last column, the averages of all 10 fell by double digits.
As the bear market unfolds, defensive stocks will again be on the defensive. Consumer staples producer Proctor & Gamble Co.recently warned that shoppers may balk at the ever-rising prices that have fueled the company’s recent growth. Consumers, especially lower-income households, are already buying staples in small quantities, switching to cheaper store brands and more-rigorously hunting for deals.
After households bought new appliances during the pandemic lockdown, they’re satiated and are now cutting back. Whirlpool Corp. is reducing its sales forecast for dishwashers, refrigerators and other products after company sales fell 8.2% in the first quarter. Whirlpool said industry-wide volume in North America fell 4% in the quarter from a year earlier while inflation is hyping costs. And worried Americans aren’t sleeping better at night. Mattress-makers are delaying product launches and cutting costs as demand for big-ticket items falls. That’s the reverse of earlier in the pandemic when home-improvement spending drove sales.
Carvana Co., a pandemic star that buys and sells used cars, is suffering. It sold 105,185 cars in the first quarter, 7,800 fewer than in the prior quarter. Rising interest rates, falling used-car prices and inflation-wary consumers are all weighing on sales. In the previous two years, Carvana doubled its sales volume.
Don’t expect the bear to hibernate until the depths of the recession can be fathomed and the Fed pivots from credit-tightening to ease. That may not be until 2023.
Gary Shilling is president of A. Gary Shilling & Co., a New Jersey consultancy, a Registered Investment Advisor and author of The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation. Some portfolios he manages invest in currencies and commodities.