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Dow Drops, But Defense Is Costly

With the market down more than 700 points in less than 24 hours, investors are clearly running for traditional havens like bonds and defensive sectors of the stock market. But that protection comes at a price.

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In a research note yesterday, Bank of America analysts said it was taking the position that the U.S. was already in a recession and investing accordingly, favoring telecom stocks, health care companies and consumer staples — the first time the bank has allocated so defensively since September, 2008. Meanwhile, individuals are flocking to bond funds. Investors pulled nearly $2 billion out of equity funds in the week ending Sept. 14 and added almost twice that ($3.85 billion) to bond funds, according to the Investment Company Institute.

But investors who flock to these traditional safe havens will pay for the privilege. From Treasurys to defensive stocks to currencies, the more conservative investments are relatively expensive. “There’s not a whole lot of upside there,” says Scott Cramer, president of Cramer & Rauchegger, a financial planning firm in Winter Park, Fla. “The pickings are slim.”

Investors who buy Treasurys now are paying a high price for a record-low yield. The 10-year Treasury closed at 1.88% Wednesday, the lowest in available history. That is also slightly less than the average 2% dividend yield on S&P 500 stocks, a rare scenario that should make stocks more appealing than the seemingly risk-free Treasury bonds, says Jeff Bernier, president of TandemGrowth Financial Advisors in Alpharetta, Ga. And with inflation at 3.6%, Treasury bond holders aren’t even keeping up with rising prices.

As for stocks, BofA isn’t alone in turning to sectors that are expected to hold up well if we enter a recession. Food company stocks, a traditional defensive play – people still have to eat – are looking expensive. For example, Kraft and General Mills sell at about 15 times expected earnings at a time when a fifth of the companies in the S&P 500 index have price/earnings ratios in the single digits. Utility stocks, which people are expected to need even when times are tough, are trading at 14 times forecasted 2011 earnings, more expensive than  the overall S&P 500, which is trading at a price/earnings ratio of 12. Consumer staples, which include food companies, are trading at ratio of 15.

Safe haven currencies and other defensive assets, like gold, aren’t cheap either. Investors have pushed up the price of the Swiss franc and the Japanese yen to the point that both governments have intervened to lower the values. Gold, at about $1,750, is slightly down from its August high, but still high by historical standards.

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    • 1

    • -1′

    • @JRS3214 Dirt and Shinny stuff.

      Shinny stuff is pretty hight right now and they are not making land anymore so I would go with dirt.

    • Hire a Financial Advisor? Most are nothing but salesmen who took an online course to pass the basic SEC tests.

      Even the ones who ‘know what they are doing’ have generally failed. They are on quotas, and need to churn to keep their jobs.

      Who to trust? Well, a CPA, CFA, or CFP is a good start. The rest of the ‘letters’ can be bought for a few dollars and a phony test.

      If they recommend an allocation that shocks you with it’s conservative makeup they pass test 1. If they work only on fees, and collect NO commission, free trips to Hawaii, or 12b1 fees, they have passed test 2.

      Maybe the rest are honest, upstanding citizens, maybe not. Why take a risk? Fee only!

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