Getting Defensive: Reflections On Current Market Conditions

With economists arguing over inflation and considering that this bull market is over 5 years old now, I thought I’d spend some time reflecting on the current economic environment and what it could mean for the stock market.

1) Let’s consider the current state of our economy. Interest rates are at multi-year lows and historically at extremely low levels. Therefore, drawing comparisons to the Great Depression might not be a fair proposition when interest rates were much higher and our banking standards, much lower. Low rates mean that people will look for places to put their money to work. Is that going to be the stock market? Perhaps. It certainly is not going to be housing. Even government bonds don’t pay as much as companies like GE (GE), Pfizer (PFE) or Bank of America (BAC) pay out in dividends.

2) A weaker economy and a possible recession bodes negatively for consumers and consumer spending. Retail stocks are tough here, but certain sectors like video games are on fire. These sectors are far and few. One way to play this is Nintendo (NTDOY.PK) which has pulled back from $75 to $55 over the last couple of months.

3) The weaker dollar allows our trading partners to benefit from our services. Therefore, those markets would continue to thrive unless the US economy remains recessionary for a longer period of time. Many of our Fortune 500 companies are doing a good chunk of business overseas. Therefore they are not as dependent on the US consumer and businesses. Companies like McDonalds (MCD) and Pepsi (PEP) keep growing their overseas business at a steady clip despite the slowdown here in the US.

4) The market is behaving poorly, with higher volume down days and lower volume up days. Many stocks, considered to be leaders of this bull market (Apple (AAPL), Google (GOOG), Caterpillar (CAT) and Goldman Sachs (GS) come to mind) have broken some serious support levels and lie below their 200 day moving averages.

5) Inflation remains in check, although some members of the central bank seem to think that the current low interest rate environment may cause it to move higher.

6) Unemployment seems to be in check too, but it has been ticking higher. With so many jobs outsourced to other countries, and hundreds of thousands of layoffs within financial institutions (BofA, Citigroup (C), etc.) as well as mortgage companies and home builders, I can’t understand how unemployment is still below 6%.

All of the above factors paint a dismal picture of the markets and buying stocks that pay high dividends, have global exposure and are not tied to the US consumer seem to be safer in this environment. I picked up some Microsoft (MSFT) and Pfizer (PFE) yesterday in order to make my portfolio more defensive. Pfizer offers a 6% dividend and has plenty of cash to sustain it. It might be time to take a look at this stock.