Historical data for the S&P 500 (^GSPC +0.73%) The Shiller CAPE (cyclically adjusted price-to-earnings) ratio dates back to 1871. During those 155 years, the ratio has crossed 40 only two times.
One of those times is happening right now. The prior instance ended in one of the worst stock market crashes ever. If history repeats itself, investors are in store for pain. However, some stocks are well-positioned to weather what comes next.
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A flashing warning signal
Economist Robert Shiller didn’t create the ratio that bears his name with the intention of developing a warning signal for potential stock market crashes. Instead, he wanted a metric to accurately assess the stock market’s valuation.
However, the S&P 500 Shiller CAPE ratio proved highly predictive of looming market declines. For example, the CAPE ratio topped 40 for the first time in late 1999 and early 2000. Within months, the dot-com bubble burst. The S&P 500 ultimately plunged nearly 50% and didn’t fully recover for seven years.
While that was the only time other than now that the S&P 500 Shiller CAPE ratio rose above 40, the metric has spiked to high levels at other times in the past with disastrous results. In 1929, the CAPE ratio soared above 30 for the first time. Students of market history know what happened soon afterward: the Black Friday crash of October 1929 that ushered in the Great Depression.
In late 2021, the S&P 500 Shiller CAPE ratio rose above 36, something that it had done only once before. A few months later, the stock market entered a bear market that lasted through most of 2022.
Three stocks built to weather the storm.
Fortunately, investors don’t have to wring their hands in despair at the CAPE ratio being in scary territory again. Three stocks, in particular, should hold up well if another market sell-off is around the corner.
Johnson & Johnson (JNJ -1.02%) It is a no-brainer pick to weather any coming storm. For one thing, it’s a member of the Dividend Kings (stocks that have increased their dividends for at least 50 consecutive years). J&J’s streak of dividend hikes dates back to 1962.
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The healthcare giant’s products enjoy stable demand even during economic turbulence. J&J is also well-positioned for growth thanks to a strong product lineup and a pipeline featuring 97 programs.
Procter & Gamble (PG +0.67%) It is another Dividend King that could help stabilize a volatile portfolio during a steep market decline. During the period following the dot-com bubble, consumer staple stocks fared much better than most stocks. And P&G recovered from the sell-off more quickly than most other consumer staple stocks.
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The key thing about Procter & Gamble is that it sells products that consumers need. Detergent, diapers, shaving cream, toothpaste, and a long list of other P&G products are essentials people buy even when they tighten their purse strings.
Enterprise Products Partners LP (EPD +1.43%) might be a surprising pick. Energy stocks can be highly volatile. However, Enterprise is a leader in the midstream energy industry with its more than 50,000 miles of pipeline. Midstream companies’ revenue doesn’t fluctuate with oil and gas prices; their operations are more like a toll road.
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Thanks to its juicy 6.2% distribution yield, Enterprise Products Partners pays investors to wait on better days. It’s also highly inflation-linked, with escalation provisions in its long-term contracts.
What if the warning signal is wrong?
Is a stock market decline guaranteed because the S&P 500 Shiller CAPE ratio is near its second-highest level ever? Not at all. The stock market may continue to climb despite its historically high valuation.
The good news is that Johnson & Johnson, Procter & Gamble, and Enterprise Products Partners can deliver solid gains whether the overall market rises or falls.
