By Justin Spittler
Let’s turn back the clock.
It’s October 2007. The S&P 500 is at a record high. U.S. housing prices are near all-time highs, too.
In short, the U.S. economy looks like it's doing great.
Below the surface, it's a much different story.
Millions of Americans are falling behind on their mortgage payments. Lenders are taking huge losses. And hedge funds are desperately trying to get “toxic” assets off their books.
The financial system is starting to crack.
And most investors have no idea. They’re still buying stocks like crazy.
I’m not reminding you of this to conjure up dark memories. I’m telling you this because I think the U.S. is heading for another major financial crisis…one that could make the 2008–2009 financial crisis look like a stroll through the park.
• Once again, most people have no clue what’s coming…
They see the Dow Jones Industrial Average at 21,000. They assume everything is fine.
But everything’s not fine.
As regular readers know, the U.S. economy is rotting below the surface.
Sooner or later, these “little” problems will turn into a full-blown financial crisis.
That could happen next month. It could happen a year from now.
• Unfortunately, no one knows when the next crisis will make landfall…
But that doesn’t mean you shouldn’t prepare.
After all, financial disasters almost always begin when people least expect them.
By the time people realize what’s happening, it’s usually too late to do anything. Their portfolios are already soaked in red.
That’s why you should always be prepared for a crisis, even when the economy looks like it’s doing OK.
Today, I’m going to show you a simple way to do this. This strategy saved investors from big losses during the 2008–2009 financial crisis. It will do the same during the next crash.
• I’m talking about owning “defensive” stocks…
Defensive stocks are companies that can make money in just about any environment.
Utility and health care stocks are popular examples. But I’m not going to talk about them today.
Instead, I’m going to discuss companies that sell goods people can’t live without—the "basics." Think cheap food, toilet paper, laundry detergent, and shampoo.
Now, we get it. These aren’t the most exciting companies on the planet. But they’re some of the best stocks to own when the stock market or economy is falling apart.
Don’t take my word for it, though. Let’s look at how a few “basics” stocks did during the last financial crisis.
First up, Wal-Mart (WMT).
• Wal-Mart is the world’s largest retailer…
It sells food, clothing, and other basic goods at very low prices.
Because of this, people shop at Wal-Mart even when the economy is in the gutter.
In 2008, Wal-Mart’s sales grew 8.6%. Its profits grew 9%.
In 2009, its sales grew another 6.8% while its profits increased 8%.
Any company that can grow its sales and profits when most businesses are losing money is a great defensive stock. That’s why investors loaded up on Wal-Mart during the financial crisis.
Just look at the chart below. You can see Wal-Mart’s stock jumped 18% in 2008. That same year, the S&P 500 plunged 37%.
• Dollar Tree (DLTR) is another “basics” stock that thrived during the financial crisis…
Dollar Tree is one of the largest discount retailers in the United States. Like Wal-Mart, it sells stuff that never goes out of style.
In 2008, Dollar Tree’s sales grew 6.9%. Its profits grew 13%.
The next year, its sales grew 9.5% while its profits jumped 22%.
Because it has such a resilient business, investors piled into Dollar Tree during the financial crisis.
Its stock surged an incredible 86% during 2008 and 2009. Between January 2010 and June 2012, it climbed another 252%.
• McDonald’s (MCD) was another great stock to own during the last financial crisis…
McDonald’s is the world’s biggest fast-food company.
Now, some people might say fast food is a luxury good, not a “basic” good. But those people have obviously never eaten at McDonald’s.
McDonald’s sells burgers, fries, and ice cream sundaes for next to nothing. It’s about the furthest thing from fine dining.
In fact, I can’t think of many other places where you can get a full meal for under five bucks.
Because it's so cheap, people will continue to eat at McDonald’s even when the economy is struggling.
This allows McDonald’s to make money when most companies are bleeding cash. That’s exactly what happened during the last financial crisis. McDonald’s profits rose 23% in 2008 and 8% in 2009.
Meanwhile, its stock price rose 6% between 2008 and 2009. That’s not a huge gain, but you have to remember that most U.S. stocks tanked during this period.
Over the next two years, McDonald’s soared 61%.
• As you can see, "basics" stocks were great investments during the last financial crisis…
I expect them to do the same during the next major meltdown.
If you haven’t already, add a few blue-chip “basics” stocks to your portfolio. Hold them for the long haul.
These “all-weather” stocks could save you from huge losses during the next major stock market crash. They could even make you a lot of money.
We’ll have more to say about “basics” stocks next week. Until then, invest with caution…
Chart of the Day: Put This Sector on Your Radar
"Basics" stocks are rallying.
Today’s chart shows the performance of the Consumer Staples Select Sector SPDR ETF (XLP). This fund invests in major consumer staples companies like Wal-Mart, Coca-Cola, and Walgreens.
You can see XLP has rallied 9% since December 1. That’s a big move for such a short period.
More importantly, XLP is now within 2% of the all-time high it set last July. If XLP breaks out to a new high, that would be very bullish for consumer staples stocks.
We’ll keep a close eye on XLP and let you know when it’s a good time to buy consumer staples stocks.
Delray Beach, Florida
March 8, 2017
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