Investors are running for cover amid ongoing global trade tensions and rising fears of recession, but popular safe-haven stocks in the consumer staples, utility and real-estate sectors are starting to look expensive. These sectors of the market traditionally known for maintaining steady profits even in times of trouble are trading at prices at least 19 times forward earnings compared to just 16.7 times for the entire S&P 500, according to the Wall Street Journal.
On top of those rich valuations, a big concern regarding safe haven stocks is rising volatility in earnings growth. “Their earnings stability has fallen off dramatically,” says Brian Belski, chief investment strategist at BMO Capital Markets.
What it Means for Investors
Over the past five years, the earnings growth of consumer staples companies like Procter & Gamble Co. (PG), Coca-Cola Co. (KO), Colgate-Palmolive Co. (CL), General Mills Inc. (GIS) and Mondelez International Inc. (MDLZ) has become increasingly volatile. Pricing pressures have been weighing on profit margins and demand for certain products has stagnated in recent years.
Despite lackluster earnings reports, the stocks of these companies are making double-digit percentage gains, some of which are outpacing the broader market by a large margin. General Mills, for example, missed its revenue forecast partly due to weakness in sales for its snack bars and cereals. Meanwhile, the company’s shares are up 40% since the start of the year.
Low-volatility stock funds, which tend to be overweight utilities, real estate, and consumer staples, posted a record $8 billion inflow during the first quarter of the year, according to Morningstar, per Barron’s. But as cash has flowed in, valuations are starting to look stretched. Earlier this year the low-vol iShares Edge MSCI Min Vol USA ETF (USMV) was trading at a 17% premium to iShares Core S&P 500 ETF (IVV) relative to earnings.
Low-volatility, safe-haven style stocks are more expensive than they have been on average since 1990, said Scott Opsal, Leuthold’s director of research and equities. “It’s a scary trade because of the valuation,” he told Barron’s in a separate article. “But people today want to own stocks because bonds are uninteresting, so they’re buying the chicken bets, which are low-volatility stocks.”
What he means when says that bonds are uninteresting is that bond yields around the world have been plunging, many into negative territory. It’s another sign of the general flight to safety as fears of recession loom. The spread between the two-year Treasury yield and that of the 10-year note inverted for the first time on Wednesday, giving investors one of the strongest recession warnings since 2007.
Looking Ahead
Despite the lofty valuations, plunging bond yields and recessionary fears have spurred a flight to safety and hunt for rich dividends. But the big question is whether the soaring price of these safe havens has made them too risky.