Stock Market’s Lifeboat May Be Sinking

(Bloomberg) -- The stock market's traditional safe haven may appear to be sending investors the all-clear sign, but don't believe everything you see.

Shares of consumer-staple companies have been some of the market's worst performers this year. Procter & Gamble Co., Clorox Co., General Mills Inc. and others in the industry that are members of the S&P 500 have seen their stock prices drop an average of 14 percent this year. That's far worse than the overall index, which, after falling on Tuesday, is now holding on to a year-to-date gain of almost 1.5 percent, not including dividends.

For market watchers, the woes of the consumer-staple sector typically have been seen as a good thing. These companies make things like toilet paper, soap and snack food that consumers tend to buy in good times and bad, so when investors are nervous about the market and looking for an investment that can withstand a downturn, they tend to run to these shares. In 2008, shares of consumer-staple makers dropped about half as much as the broader market. They also outperformed in 2000 and 2001. 

Lately, though, they haven't been much of a haven, even as some have argued the drop in the sector represents a buying opportunity. Consumer staples stocks fell on Tuesday along with the rest of the market.

The fact that this year's stock-index wobbles haven't caused the same stampede into consumer shares may have less to say about the health of the market than uncertainty surrounding giants like P&G and Clorox. P&G, which makes Tide laundry detergent and Gillette razors, reported weak sales growth in the first quarter, and said it wasn't able to raise prices along with costs. Shares of the company, which reluctantly appointed activist investor Nelson Peltz to its board after he questioned whether the company's current strategy would boost revenue, are down more than 20 percent this year. 

But it's not just P&G. Changing consumer tastes, including a preference for healthier foods and organic household products, as well as internet commerce have been raising doubts about the safety of investing in giant consumer-staples companies. Earlier this month, at the Milken Institute, Jorge Lemann — the billionaire co-founder of 3G Capital Inc., which orchestrated H.J. Heinz's merger with Kraft Foods, as well as Burger King's teamup with Canadian doughnut chain Tim Horton — said his faith in big brands may have been misplaced. Warren Buffett, too, recently said that as brands weaken, retailers are gaining the upper hand on the large consumer-products companies that used to be able to demand prime shelf space and other concessions.

Predictions for sales growth this year and next have sunk 8 percent for consumer-staple companies, more than any other sector in the S&P 500. In a note out on Monday, Jonathan Golub, Credit Suisse's chief U.S. equity strategist, downgraded staples to “underweight,” citing shrinking profit margins and the fact that many of the stocks still trade at a premium to the market — which he says isn't deserved.  

All that means investors may not only need to find a new place to ride out market storms, but also a new weather vane to predict when they are coming.

To contact the author of this story: Stephen Gandel at sgandel2@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.

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