Daily Gains Letter

Dow Jones Industrial Average at Record High; Defensive Plays for the Bottom 99% of Americans Who Missed the Bull Market

By for Daily Gains Letter |

110313_DL_whitefootThe Dow Jones Industrial Average hit an all-time high of more than 14,400 last Friday, soaring past the 2007 pre-recession record of 14,164. Thanks to the Wall Street hoopla, most Americans probably believe the economic recovery is firmly entrenched and the good times will keep rolling.

Those on Wall Street are certainly cheering, as are those privileged few who were already rich before the markets took middle-class American down five years ago. Unfortunately, the rest of the country doesn’t have reason to celebrate.

If you’re the Federal Reserve, this disconnect doesn’t make sense. After all, higher stock prices boost consumer wealth and confidence, which translates into increased spending.

Over the last five years, we’ve learned that unlike water, wealth trickles upward.

During the first two years of the Great Recession (2007–2009), average real income per family plummeted by more than 17%, the largest two-year drop since the Great Depression. (Source: Saez, E., “Striking it Richer: The Evolution of Top Incomes in the United States,” Berkeley University of California web site, January 23, 2013.)

But surely things got better for the average American after the so-called “economic recovery” kicked in? Not quite. Between 2009 and 2011, the top one percent of households by income reeled in 121% of all gains. How can anyone grab more than 100% of anything? It’s easy when you factor in inflation. The top one percent became 11.2% richer, while the bottom 99% became 0.4% poorer.

In 2010, the first full year of the economic recovery, the top one percent claimed 93% of all income gains.

The top one percent didn’t just do better than the bottom 99% during the boom years, either. Between 1993 and 2011, the top one percent’s incomes soared 57.5%; the income for the rest of America inched up just 5.8%.

Not a total surprise when you consider U.S. corporate profits after tax have increased by more than 30% since 2007—the year before the markets tanked.

 

dl_03112013_image001Chart copyright Lombardi Publishing Corporation 2013;
Data source: Federal Reserve Bank of St. Louis web site, last accessed March 10, 2013.

For the financial minority living in the bottom 99% of America who missed the recovery, it’s probably a little unnerving to consider “this” a bull market—and to think that we’re already primed for another correction.

While the markets may be performing well, the average American isn’t. Unemployment remains high; as does household debt. Gross domestic product (GDP) is essentially flat. Housing may be a bright spot, but that’s relative—it’s fragile at best.

Where does the average American investor turn to when the markets are on fire, but the underlying economics are mired in quicksand? One of the best places to look in times of euphoric uncertainty is in defensive stocks, those equities that add value over time and do well regardless of economic indicators.

Technically, defensive stocks outperform the markets during a recession and underperform the market during a recovery, but the last five years have shown us that they perform well regardless.

Some of the best-performing defensive stocks include Johnson & Johnson (NYSE/JNJ), The Procter & Gamble Company (NYSE/PG), The Coca-Cola Company (NYSE/KO), and Altria Group, Inc. (NYSE/MO).

There is a constant disconnect between Wall Street and Main Street. The Dow Jones Industrial Average is hitting record highs, but the underlying economic indicators are pretty grim. It’s just a matter of time before the sentiment on Wall Street runs in step with the rest of the country. When the two finally do run in sync, investors will be looking to find shelter.

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