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Difficulty: Easy
1) The S&P 500 Index suffered a peak-to-trough price decline of -57% between 9 October 2007 and 9 March 2009
The most defensive sectors during this period included Consumer Staples, Utilities and Health Care. These sectors offer goods and services that may be deemed as necessities.
Meanwhile, Real Estate and Financials performed worst given that it was problems within these sectors that sparked the 2008 recession.
2) Only 10 stocks managed to generate a positive return during the peak-to-trough sell off in 2007-09
Only 10 stocks out of the current S&P 500 constituents posted positive returns between 9 Oct 2007 and 9 Mar 2009. These stocks were skewed towards businesses that offered goods or services that were low price alternatives (e.g. Dollar Tree).
Meanwhile, the worst performing stocks lost between 88.5% and 99.5% of their market value during the sell off.
3) With global stock valuations at expensive levels, it makes sense to diversify into defensive “recession-proof” stocks
We review the year-to-date price action and fundamental metrics of the stocks that performed the best during the peak-to-trough sell-off in 2007-09.
The InvestQuest’s View: We will be tracking this list of stocks closely and potentially adding positions should we find attractive entry-points. That said, do note that we always conduct fundamental analysis into stocks before deciding to invest.
The stock market is not looking cheap right now
Across various measures, stock markets are looking expensive and one should be extra cautious when buying into stocks now. Commonly followed valuation metrics such as price-to-earnings ratios (chart below) are at its highest levels since the dotcom bubble.
Caveat to note (optional). Now, it has to be said that many investors are expecting a temporary drop in company earnings this year due to COVID-19 measures and that this should help explain the higher price-to-earning ratios now. You can think of it as investors being willing to pay more for companies now despite the low 2020 earnings because they expect the companies’ earnings to improve from next year onwards. However, even if we discount the P/E ratio by 30% (the amount S&P 500 earnings are expected to drop in 2020), the ratio still comes to 15.5x, which is still above the 15-year average.
The speed of the stock market retracement from March lows has also far surpassed the average retracements experienced in the past six US recessions, indicating that the market is pricing in a much faster V-shaped economic recovery compared to prior recessions.
The InvestQuest’s View: For investors who are more cautious on current stock market valuations but want to stay invested, one possibility is to rebalance into more defensive “recession-proof” stocks. We look to 2007-2009 for examples of such stocks.
The Best and Worst Performing Sectors during the 2008 Crisis
The most defensive sectors during the 2008 recession were those that supplied necessary goods and services. These goods and services have very “inelastic demand”, which just means that people will consume them even when they feel poorer. The sectors include consumer staples (everyone still has to do their groceries), healthcare (you will still hope to visit a doctor and eat medicine after falling ill) and utilities (you will still want to shower and have your lights on at night).
Given that the previous recession stemmed from a housing and banking crisis, the worst performing sectors were Real Estate and Financials.
Total returns shown are for the time period corresponding to the peak-to-trough of the S&P 500 Index, between 9 Oct 2007 and 9 Mar 2009.
Total return figures are inclusive of dividends received.
With US unemployment rates expected to top out above 20% this year (compared to peak unemployment of “only” 10% in 2008), I would expect to see the same defensive industries performing well.
Notwithstanding the above, in my view we should expect three key differences in the S&P 500’s performance by sector this time around, as compared to 2008:
1) The energy sector should fare much worse, as it is facing longer-term supply-demand mismatch issues, especially with diminished demand from industrial activity, road and air transport.
2) The tech sector will likely be more resilient due to changing behavioural trends due to increased work from home arrangements, leading to increased demand for cloud services, e-commerce and home entertainment services
3) The real estate sector should also be more resilient, particularly for owners of core property assets, due to record low interest rates, stricter lending guidelines compared to pre-2008 and an easing of liquidity globally.
The Best Performing Stocks during the 2008 crisis
Total returns shown are for the time period corresponding to the peak-to-trough of the S&P 500 Index, between 9 Oct 2007 and 9 Mar 2009.
Total return figures are inclusive of dividends received.
Stocks that performed well during the 2008 recession include companies that offered goods or services that were lower price alternatives. For example:
- Autozone, Advance Auto Parts and O’Reilly Automotive are retailers of vehicle parts. These businesses thrive in a weak economy, as more individuals choose to repair their cars, instead of buying new ones.
- Walmart and Dollar Tree are discount stores that sell general merchandise and groceries, which are popular for consumers looking for value.
- Ross Stores is a discount apparel chain in the US (similar to TJX Companies). Their slogan “Dress for Less” says it all, as they strive to offer 20-60% savings on branded apparel compared to departmental store retail prices.
- Church & Dwight is a producer of consumer household and personal care products (image below), where demand remains fairly stable across an economic cycle.
The Worst Performing Stocks during the 2008 crisis
Apart from banks and property-related firms, casino stocks such as Las Vegas Sands, MGM Resorts and Wynn Resorts were also among the worst-performing during the 2008 stock sell off.
Total returns shown are for the time period corresponding to the peak-to-trough of the S&P 500 Index, between 9 Oct 2007 and 9 Mar 2009.
Total return figures are inclusive of dividends received.
Do note that the above list has an inherent survivorship bias, as we have only included current S&P 500 constituent stocks.
The list of “recession-proof” stocks and their performance in 2020
Remember the list of stocks that outperformed during 2007-09 peak-to-trough? Here’s how they’ve done in 2020.
Not all of these stocks would do well in today’s environment… We do note that some of these stocks may have performed well in the 2007-09 peak-to-trough for very company-specific reasons that may not apply again in 2020. Concho and People’s United Financial look like suspects.
But I’m keeping my eye on the laggards (i.e. those that have not rallied too hard yet and have the potential to outperform later).
We’re also watching out for potential alternatives to these names (i.e. other companies similar to Dollar Tree or McDonald’s that are less well-known).
Sad story: I had put in an order for Dollar Tree at US$78 two weeks ago, but was sadly too greedy and put a limit order that was just slightly too low. Alas, my order was not filled. Now it’s at US$97! Lesson learned is that A) I am not a trader and should just put in at the going market price and B) this list may still have some gems left waiting for me to explore. Separately, please note that our strict policy is to put shareholding disclaimers whenever we hold stock positions for any of the stock mentioned! If we don’t put disclaimers, we don’t hold any of that stock at the time of publishing.
The InvestQuest View: We will be tracking this list of stocks closely and potentially adding positions should we find attractive entry-points. That said, do note that we always conduct fundamental analysis into stocks before deciding to invest.
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