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 its "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 lower 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 (DLTR - Analyst Report)
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.
Abbott Labs (ABT - Analyst Report)
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 selloff.
Aqua America (WTR - Analyst Report)
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 case.
Tick, tock, tick, tock...
Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.
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