Tick, tock, tick, tock...
The U.S. Treasury Department warns that it is just days away from
not having enough money to pay its bills unless the debt ceiling is
raised. While it would seem obvious that debt payments would be
prioritized over other obligations if needed, Treasury Secretary
Jacob Lew has claimed that this might not be doable, stating that
"systems were not designed to not pay our bills"
While this sounds scary, if you look at both the stock and bond
markets, they seem pretty calm about the whole situation. The
S&P 500 is trading above 1700 and within about 1% of its
all-time high. And perhaps the best barometer - the yield on the 10
year U.S. Treasury note - is almost 30 basis points
than where it was in early September:
While it appears that investors still think the odds of a default
is near 0, keep in mind that the market also thought firms like
Bear Stearns and Lehman Brothers were fine just hours before they
collapsed. In other words, sometimes the market gets it wrong.
While a U.S. default seems unthinkable at the moment, shouldn't an
investor have a contingency plan just in case?
When Risk-Free Isn't Risk Free
In your typical financial crisis, investors flee to the safety of
U.S. government bonds. It happened during the financial crisis. It
happened during the European debt crisis. That's why Treasury bonds
are often the proxy for the "risk free" rate in finance.
But where do you go when risk-free is no longer risk free?
While an obvious answer would be "cash", if you're not willing to
abandon stocks altogether, then there should be a few corners of
the market that would likely weather the storm better than others.
These would be stocks in the following sectors:
- Consumer Staples
- Healthcare, and
Unsurprisingly, these are each defensive, low beta sectors that are
high up on consumers' lists of needs.
3 Ultra Safe Stocks
While the ultimate ramifications of a U.S. default are nearly
impossible to predict, these 3 stocks should at least hold up much
better than the overall market:
Dollar Tree is a discount retailer with thousands of stores in all
48 contiguous states. The company benefited tremendously from
consumers "trading down" to their stores during the Great
Recession, and it would likely see a similar boost in foot traffic
following a U.S. default as households tighten their belts. It's
tough to say exactly how the stock would perform, but if 2008 is
any indication, it would be one of the few stocks to shift into.
Shares of DLTR surged +61% that year.
This large-cap diversified healthcare company derives 70% of its
sales from outside of the United States and operates in relatively
inelastic, stable businesses like branded generic pharmaceuticals.
With a beta of 0.25, shares of Abbott are not highly correlated to
the S&P 500 and should significantly outperform during a market
Is there anything human beings need more than H2O? Aqua America is
a water utility serving approximately 3 million people in
Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey,
Indiana, Florida, Virginia, and Georgia. The stock has a beta of
just 0.18 and currently yields about 2.5%, which is close to what
you would get on a 10-year Treasury note.
The Bottom Line
A U.S. default still seems unthinkable, but it is not impossible.
Investors looking for some safety without fleeing the stock market
altogether should consider these three ultra safe stocks... just in
Tick, tock, tick, tock...
Todd Bunton, CFA is the Growth & Income Stock Strategist
and Editor of the
Income Plus Investor service
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