Positioning for a 3 Year Downturn

After 6 straight quarters of declining earnings for the S&P 500, a downturn of 3 years in length is a real possibility.  To find another large downturn that lasted for that long, go all the way back to the 1930s.

That’s what the WSJ’s Jason Zweig did in asking the question, in the worst of times, which are the best stocks? in the article 1930s Lessons: Brother, Can You Spare a Stock?

Zweig found that logging was the only sector that gained ground in the period 1930 to 1932. ETF investors can invest in timber through the Claymore/Clear Global Timber Index ETF (CUT).

To find other sectors that gained ground, Zweig had to stretch the analysis to a 4 period.  Once 1934 is included, the stocks that did the best were cheap vices including tobacco, sweets and fried food.

With the demise of the Focus Shares Sin-Index Fund (PUF), ETF investors need to turn to consumer staples to gain significant exposure to companies that supply cheap vices.  PowerShares FTSE RAFI Consumer Goods Sector Portfolio (PRFG) top holdings include cigarette makers Altria and Phillip Morris International as well as beverage and food giants Coca-ColaPepsico and Kraft.  One watchout on PRFG, the fund is 22% invested in consumer discretionary sectors such as automotive and homebuilders.

Zweig also mentions that intermediate term corporate bonds returned 6.7% a year from 1930 – 1932 and effectively double that once you take deflation into account.  The largest intermediate term corporate bond ETF is the $8 billion iBoxx $ Investment Grade Corporate Bond Fund (LQD).