New threat to stock market – Investors flee into stocks that are not cyclically sensitive

What do shares like Anheuser-Busch, Beiersdorf, Coca-Cola, Danone, Linde, Mc Donalds, Nestle and others have in common? They are regarded as stable, safe dividend payers – and their prices are currently rising faster than their profits.

The expensive buy of stability on the stock market

How often have you been able to read and hear in the business media lately: Hands off at the stock market from the cyclical stocks in the current (final) phase of the upswing to the conservative stocks of consumer goods, pharmaceuticals and utilities, which offer a certain stability during downturns. In addition, there is the large and stable dividend policy of companies, as a kind of interest substitute in times of zero interest rate policy.

However, this logical and sensible investment strategy has led to a serious disadvantage. These companies are now very expensive, with a price/earnings ratio of over 25. By way of comparison, the average P/E ratio for the S&P 500 is historically 15.5, while the average for the DAX is under 13.

The problem only becomes clear when the profit growth of these pearls is taken into account. It is usually in the single-digit range over the years, between five and 10 percent, but the price increases since the beginning of the year have mostly been around 20 percent. “Bubbles over bubbles on the markets, especially on the stock market, wherever we look”, would probably shout the skeptics now.

A historical example

In the 1960s and 1970s there was a period in the USA in which economic growth was weak, but inflation rates had climbed above the five-percent mark. The stock market was looking for stable stocks with stable dividends and the “Nifty Fifty” were born. Names such as Coca-Cola, General Electric, IBM, Johnson&Johnson and 3M are still well known today and characterise the equity culture in the USA.

What was the consequence of this flight into supposed stability? In some cases, the values rose to 50 times their annual profit and plunged by 50 to 70 percent in the coming crisis. It took more than ten years for the Nifty Fifty to regain their old value. The cyclically resistant stocks are not yet at these heights, but here too the rule is: the stronger the rise in prices in relation to corporate profits, the greater the risk of a crash. Even if we can count on a high degree of reliability in their business model.

Security on the stock market is often deceptive on a short term.


Will the move into these stable business models really help in the event of a recession? “Is butter good, cheese is good as well” is a well-known stock market saying. In terms of the bull market, but in a bear market the same applies. While the first step is to divest oneself of risky stocks in a downturn, often also the “silverware” has to be sold, whose price has risen enormously due to the high valuations.

New York Stock Exchange 2009
By Government of Thailand – Flickr, CC BY 2.0,
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