By Nick Rokke, analyst, The Palm Beach Daily
We’re in the late innings of the second-longest bull market in history.
There’s a lot of money to be made over the next couple years during this “melt up” phase.
But not every sector will benefit…
In fact, one sector deemed “safe” by most analysts is about to plummet.
In today’s essay, I’ll tell you what this sector is… explain the two reasons why things will only get worse from here… and show you why history says it’s time to avoid it at all costs.
If you don’t make enough from your trades or you’re unhappy with your income, this is something you’ll really want to check this out…
History Tells Us to Stay Away From These Stocks
To see what I’m talking about, we need to take a look at what’s happened at the end of previous bull markets.
Here’s a chart of one company from this sector versus the S&P 500 over the past 22 years.
As you can see, this company fell about one year before the S&P did in 2000.
It fell in stride with the S&P in the financial crisis of 2008. And again, it signaled the 19% market correction in 2015 as interest rates began rising.
The name of the company may surprise you. When people think of safe stocks, this one is normally at the top of the list.
It’s Proctor & Gamble.
P&G makes things we all need and use every day… like Charmin toilet paper, Dawn dishwashing detergent, Crest toothpaste, and more…
Analysts call P&G safe because it makes things we’ll always use no matter what the economy does. Wall Street calls companies in this sector “consumer staples.”
And consumer staples just tanked. Over the past month, P&G fell 13%. And other stocks in this sector like Colgate, Kimberly-Clark, and PepsiCo have also fallen double digits.
Many investors just lost a lot of money in these supposedly safe stocks.
As I mentioned above, there are two reasons why things aren’t going to get any better for investors in these companies.
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The Income Extermination Is Here
The first reason why these companies are falling is because of an event we’ve called “The Income Extermination.”
Over the last 35 years, interest rates have generally gone down. The 10-year Treasury yield went from 15.7% in 1981 to 1.6% in 2016.
That’s important because the 10-year Treasury is commonly called the “risk-free rate of return.” It’s what you can earn without taking any risk—Treasuries always make the interest payments and return the principal.
New investors had to settle for lower and lower yields on risk-free assets. Eventually the yield became so low, investors began looking elsewhere for income.
This brought investors into stocks that pay high dividends. Some call these “bond replacements.” And consumer staples stocks fit the bill… P&G issues a 3.4% dividend. Colgate’s is 2.3%. And Kimberly-Clark and PepsiCo’s dividends are 3.6% and 3.0%, respectively.
Now that interest rates are going back up, investors are dumping their “bond replacements” to go back to the safety of bonds.
That’s not the only reason these types of stocks will continue to fall…
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Consumer Staples Go Down First
At the end of every major cycle, these “safe” high-dividend stocks tend to go down before the overall market does.
I showed you this earlier with Proctor & Gamble. This company fell well before the overall market did in the last three market peaks.
And shares of this consumer staples company fell 53% in the dot-com boom and 39% at the end of the housing boom in 2007. And it had another large fall—27%—during the 2015 correction.
But P&G isn’t the only consumer staples company that falls at the end of bull markets. Colgate, Kimberly-Clark, Johnson & Johnson, and PepsiCo all have similar chart patterns.
And these stocks didn’t just fall a little bit. They took an average fall of 30% in the recent market pullbacks.
This happens because investors forget about safety and value at the end of bull markets. They start chasing the hot investments. In 2000, it was internet companies. In 2007, it was housing companies and Chinese stocks.
Now people are paying more attention to cryptocurrencies and marijuana stocks. The reason is simple—the gains in these sectors are enormous.
Euphoria takes hold and boring companies get forgotten at the end of bull markets.
These Companies Will Continue to Get Crushed
Right now, we’re seeing interest rates rise like in 1999 and 2007. And we’re in the late innings of a massive bull market.
These two conditions mean consumer staples will fall further. If these companies fall as they did during the end of the last three bull markets, they still have another 20% to go.
P&G has already fallen 13%. If it falls a similar amount as the last three market peaks, it will fall from $80 today to $60 in the next couple years.
Now is not the time to be buying consumer staples stocks.
I’ll let you know when a good buying opportunity opens up, but for now, stay on the sidelines.