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Gold $1197 3.1
Silver $14.81 0
Talk to a representative: 855-242-4121


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Weakness in Consumer Staples Stocks Points to Financial Crisis

An article at Investopedia suggests recent weakness in a key equities sector that is usually considered “defensive” and thus “safe.” This is one more sign among many recent indications that investors should be prepared for a financial crisis.

The article noted the performance of consumer staples stocks during the trading week of April 16 to April 20. In those five days, the sector fell roughly 4 percent, while the Dow Jones Industrial Average ended the same week in a slight up position.

It was a decidedly poor showing from a sector thought to be a safe haven among equities. Consumer staples are products regarded as essentials, such as food and household items. These products will always be purchased by consumers, regardless of how bad the economy gets. A classic consumer staple company is Procter & Gamble (NYSE: PG), maker of Crest® toothpaste, Tide® laundry detergent, and Vicks® cough and cold remedies, among a wealth of other household products you probably recognize.

The 4 percent drop was the third such decline in the last two months. It’s actually the frequency of the pullbacks that’s reminding some people of the 2008 financial crisis. That was the last time consumer staples stocks demonstrated a similar level of volatility. “We hadn’t had a cluster of weakness that tight since the ’08, ’09 lows,” remarked Instinet senior equity trader Frank Cappelleri in the Investopedia article. He added that “a long-term character change could be afoot” in the markets. Since the S&P 500 reached its high on January 26, it is down roughly 7 percent, while the consumer staples sector (proxied by the Consumer Staples Select Sector SPDR Fund ETF) is down more than 15 percent.

Can Equities Save Investors in a Financial Crisis?

The recent weakness in this supposedly “safe” sector serves another purpose besides suggesting another financial crisis. It also demonstrates the inadvisability of looking to this – or any other equities sector – for true, effective diversification when trouble strikes.

If investors can’t depend on this safe sector, what CAN they depend on? For a hint, look at the following chart that shows the performance of silver, the Dow Jones Industrial Average, and the consumer staples sector (symbol: XLP). This is how each of those assets performed in the midst of the 2007-2012 global financial crisis.

Performance of Silver, DJIA, and Consumer Staples, November 2008 through April 2011

(Chart courtesy of StockCharts.com; consumer staples proxied by Consumer Staples Select Sector SPDR Fund ETF (NYSEARCA: XLP)

The most obvious takeaway from this chart is how well silver did during this period. Another takeaway is how closely consumer staples mirrored the performance of the Dow, including the first few months when the Dow was still tanking. Does it appear that consumer staples offered any real diversification advantage to investors who had also bought equities in the market? It certainly doesn’t look that way.

Alternative Assets – Such as Gold and Silver – Provide Genuine Diversification

IRA and 401(k) investors don’t have to resign themselves to investing in stocks that offer the meager potential of not going down quite as much as the broad market during economic turbulence. Physical gold and silver have a demonstrated record of providing true, effective portfolio diversification – better diversification even than so-called defensive equities.

To learn more about how alternative assets such as physical gold and silver can potentially benefit your portfolio and help you worry a little less about your retirement money, call Augusta Precious Metals at 855-242-4121. Our knowledgeable gold and silver professionals look forward to answering your questions so you can decide if the strategic acquisition of precious metals is right to help you reach your financial objectives. At Augusta, we look forward to helping you add a little of your own “defense” to protect your assets.

Consumer staples are generally seen as a “safe” sector within the equities asset class. But this sector has shown tremendous volatility lately, leading to what some experts are saying is more than the possibility of a financial crisis. It’s a reminder that, when it comes to achieving effective portfolio diversification, equities investors may have to be willing to look to alternative assets, such as physical gold and silver, to properly get the job done.

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Michael Dallo, CPA, JD, LL.M. is a tax attorney and certified public accountant (CPA) of Dallo Law Group, a Professional Corporation. For over 10 years, Michael has zealously represented hundreds of clients in resolving tax disputes with the Internal Revenue Service and California taxing agencies, as well as developing sound tax positions and arguments to minimize their federal and state tax liability.