Consumer Staples Still Win In This Economy (XLP)

Maybe an Obama election wasn’t such a good thing for the market. Today, the Dow closed down -486 points and the S&P 500 followed suit by dropping -5.3%. True, one day does not make a market. But when that day happens to follow the biggest election turnout in a generation, it tends to suggest more downside in the pipeline. Time will tell if that’s the case. Right now, we’re not betting against it.

Stay Defensive

With that in mind, we’re watching for more downward pressure. If you’re going to stay invested, you should look to defensive sectors to protect against undue downside, while still maintaining a healthy shot at the market. In a Bear Market, those opportunities are usually limited to certain sectors. For example, health care, because people still don’t like being sick, defense stocks, because we’re still at war, and consumer staples. Surveying the investment horizon, we think Consumer Staples has the best opportunity for growth in this economy.

Here’s why…

1. Consumer Staples Means Basic Food

Regardless how the economy acts, people still eat. Consumers may not shop at Whole Foods, but they’ll still buy groceries. Companies like Wal-Mart (WMT) and Safeway (SWY) will continue to rake in revenues from hungry customers. In addition, these companies should continue to receive additional revenue from consumers who normally shop at specialty stores, but can no longer afford to.

2. Consumer Staples Means Basic Comforts

Consumers may not be shopping at Sharper Image any more, but there are other creature comforts that will be difficult for Americans to abandon. For instance, soda is a prime example of an unnecessary, but popular consumable. Coca-Cola (KO) and PepsiCo (PEP) will still sell products during a prolonged downturn. In addition, companies providing toiletries and convenience like Procter and Gamble (PG) and CVS Pharmacy (CVS) stand to do well during a shifty economy.

3. Consumer Staples Means Basic Vices

Do you remember when European-based InBev purchased Anheuser-Busch (BUD) for $52 billion? This happened in July, one year after sub-prime problems hit Wall Street. And yet, the deal still happened. InBev knew that Americans still want their Bud Light with football games and NASCAR races. Americans also want their Marlboros. Phillip Morris (PM) and Altria Group (MO) will also benefit from those routines. In short, old habits die hard. Because of that, Consumer Staples gets a boost.

Perhaps the best way to capitalize on this defensive sector is with Consumer Staples Select Sector SPDR (XLP). It is the most liquid ETF in the sector with average volume around 5,700,000 shares traded daily. It includes all of the blue chip companies mentioned above plus Kraft (KFT), Kimberly-Clark (KMB), Archer Daniels Midland (ADM) and more. In addition, XLP appears to have stabilized on the chart. Like most ETFs, it fell during October, but it seems to be rising on the back of stable consumer demand in this soft economy. We think it’s a great pick at this time. To go with a solid defensive pick, get XLP.

All the best.

Note:
Keep in mind, the Pick of the Week is usually intended for aggressive investors. Don’t risk money you can’t afford to lose. You will need to decide when (and if) it is time to sell.