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| Analysts say consumer spending will squeezed this holiday season and beyond, leading to a slowdown in stock performance and driving investors to safer industries. |
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NEW YORK (CNN/Money) – Some investors are switching to defensive plays in the stock market as they bet high energy prices and rising interest rates will squeeze consumer spending and result in an economic slowdown or even a recession sometime late next year.
Investors seeking shelter from what they perceive as a looming economic slowdown have pumped money into traditionally defensive industries such as energy, utilities, healthcare and tobacco.
Although the S&P 500 is down roughly 1 percent this year, shares of oil and gas refiners have jumped about 66 percent according to Baseline, a financial data tracker.
Besides their stance as defensive or safe stocks, the oil sector has benefited from the drastic rise in oil and gasoline prices but other non-energy related sectors which have been traditionally considered as safe bets during economic downturns have also benefited. Industries are considered defensive because they are among the last things that consumers cut from their budgets when the economy cools.
For example, this year water utilities rose around 28 percent. Healthcare services jumped about 25 percent. Life and health insurance gained 19 percent. Tobacco is up 17 percent and drug retailers climbed 13 percent higher.
Meanwhile many industries that are more dependent on consumer's discretionary spending have seen their share prices plummet.
Movies and entertainment stocks are down roughly 16 percent for the year. Apparel retailers, Consumer electronics, casinos and gaming all fell nearly 20 percent so far this year.
Add to this, industries with unique problems like airlines. Industrywide, shares have fallen roughly 11 percent. Auto stocks are nearly 40 percent lower and pharmaceuticals, which have sagged about 10 percent.
The question for investors is whether the trend towards defensive plays will continue in the fourth quarter and beyond, or is now the time to go bargain hunting among the laggards?
Room to go higher?
Energy stocks have obviously benefited from the record oil and gas prices seen over the last several months and some think they can't possibly rise any more.
"The growth in energy has been phenomenal," said Hugh Johnson, chairman of the asset management company Johnson Illington Advisors.
Johnson said that sectors that have been such top performers seldom have the stamina to continue that performance year after year, "Common sense alone says energy is not going to be the leader."
But none of the analysts contacted for this story predicted energy would lose much more than the 10 percent or so it already has since oil prices fell from highs reached in late August.
"Demand will keep energy tight," said Brett Gallagher, head of U.S. equities at Julius Baer. "Any pullback I view as an opportunity to add to positions."
But aside from utilities, which one analyst said were trading "fairly richly" right now, the general feeling is that other defensive stocks that have performed well this year – healthcare, tobacco, retail drugs, mining – will continue to do well next year as investors flee consumer discretionary groups such as apparel and electronics retailers in the face of a slowing economy.
"I feel we're going to have a very slow spending season this Christmas," said Harry Clark, head of Clark Capital Management. -
"The economy and the growth rate of earnings will slow," said Johnson. "There's a good chance that investors will continue to do what they've always done. They will migrate to the safer segments of the market."
In the bargain bin?
Some industry groups whose stocks are off sharply have specific problems that are somewhat unrelated to the wider economic picture.
Auto manufactures are struggling with high health care and pension costs as well as trouble wooing consumers. Airlines also have labor issues as well as the added burden of high fuel costs and a price war. Pharmaceuticals, normally defensive stocks, have been under increasing pressure in the face of several major lawsuits related to drug safety.
For investors tempted to search for bargains among these underperforming stocks, one analyst urged caution.
"Would I bottom fish in these industry groups? Emphatically no," said Johnson. "I see no reason to believe these problems will be solved anytime soon."
But others see hope for drug and airline stocks.
"You're starting to see the airlines turn around, they are going to be a good buy again," said Clark, mentioning American Airlines (Research), Continental and U.S. Air.
"With pharmaceuticals, the problems are pretty well known," said Gallagher. "I don't think they're going to get any worse from here."
As for the rest of the down sectors, the general feeling is that they are packed full of industries that depend on consumer's disposable income – hotels, movies, publishing, apparel, brewers, electronics and the like – and they will continue to be hit by a downturn in consumer spending.
Clark even suggested keeping some money in cash, so as to be better able to pick up bargains when the market bottoms out – which he thinks will happen sometime in the third quarter of 2006.
He said not to be tempted by a possible rally this year in the fourth quarter, although he held out little hope people would heed his advice.
"No matter what I say or what you write, the public will buy at the top and sell through the bottom," he said. "They always do."
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