In today’s issue:

  • Cyclical vs defensive market cap is at an all-time high
  • This implies the market overall has become riskier
  • Defensive investors nevertheless have options

Stock market index providers make regular updates to their weightings, normally at least on an annual basis.

For those indices weighted by market capitalisation, these changes reflect trailing performance: the stronger performers’ weightings increase; the laggards decrease.

As we know, past performance is not always a good predictor of future results. Sometimes, it’s the exact opposite.

Now may be one of those times. Here’s why…

As I wrote recently, US stock market capitalisation has reached nearly 70% of the global total. And within the US, less than 20 companies comprise 75% of that.

That’s a huge degree of concentration.

And it’s overwhelmingly in cyclical sectors, that is, those prone to particularly large declines when the market corrects or crashes.

US index provider Standard and Poor’s traditionally updates its constituents and weightings each June.

Based on those weightings and sector performance to the end of 2024, the weightings of the most cyclical sectors were as follows:

Adding those up we get to nearly 75% of total market cap. That’s a record. This means the market has become inherently riskier than it was some years ago.

Now, let’s take 60 years of historical sector-by-sector returns data and see how these sectors have performed, on average, in recessionary economic conditions:

Those are all double-digit declines. They don’t represent market bottoms, mind you, just the average underperformance during recessionary periods in the past 60 years.

The bottom in each case would be at least slightly lower, perhaps more so.

So, based on history, 75% of the S&P 500 is likely to decline by at least the figures above under recessionary conditions.

That’s the potentially bad news.

Two of the best UK stocks to buy in 2025?

The good news is that defensive sector market valuations aren’t historically elevated. Yet only 25% of total S&P 500 market cap is comprised of defensive sectors.

Those sectors are normally unchanged or barely decline at all under recessionary conditions. They thus provide a place to hide.

One of them is also trading particularly cheaply in valuation terms at present: energy. At a price-to-earnings (P/E) ratio of only 14, energy trades at less than half the P/E of the S&P overall, which has risen to above 30.

One can also apply other valuation metrics to the energy sector. No matter from which way you approach it, however, the sector is historically cheap versus the market overall.

The same is true of the UK’s two energy giants, BP (BP) and Shell (SHEL). They currently trade at slightly lower P/Es to the S&P energy sector.

Having trailed in performance the past two years, the former is, on paper at least, the better value of the two.

But BP is also the one that probably stands to lose the most if the UK government continues to stand in the way of any further North Sea oil and gas field development.

There has also been some talk that, if not allowed to proceed with current projects, BP and Shell might consider a merger or takeover.

If that were to go ahead, the combined company would be in a good position to redirect its expertise to regions that are more appreciative of what they have to offer.

As I wrote yesterday, I believe that recessionary conditions are on the way in 2025. If I’m right, the US market, based on current cyclical sector market capitalisations and historical performance, is currently a dangerous place to be.

Cyclical industries are too, regardless of where in the world they might be.

In any case, both BP and Shell are defensive companies. They’re in an essential industry, trading at low valuations and paying generous dividends.

If you’re looking for a place to hide from all the various risks mentioned above, the UK’s two traditional energy giants are amongst the most obvious safe havens.

Until next time,

John Butler
Investment Director, Fortune & Freedom


Lose-Lose Deals

Bill Bonner, writing from Baltimore, Maryland

Investors sat on the edge of their chairs on Friday. Trump said he was going to impose tariffs on Mexico and Canada. Both countries promised to retaliate. The madness of it was just beginning to become clear.

There are win-win deals. There are win-lose deals. And there are lose-lose deals. Mr. Trump has found one – a deal so bad that a poll of ‘39 of the nation’s leading economists’ found not a single one who approved of it. The Wall Street Journal called it ‘the dumbest trade war in history.’

Imagine a town that tries to protect itself from competitors. Rather than freely trade with the shoe shop in a nearby-town, it demands a pay-off; ‘if we buy your shoes,’ it says to the owner, ‘you’ll have to pay us a 25% tariff.’ It makes the same proposition to the car dealer in the next town over… and with the newspaper in the state capital.

What do you think? Does this town get rich… or does it become a joke?

The idea of punishing trade is silly; specialization is the sine qua non of prosperity. One man grows tomatoes so another can focus on corn. One takes advantage of his long summers to welcome tourists… another drills for oil in the chilly north.

But you can only benefit from specialization if you can trade. Trade with neighbors. Trade with different states. Trade with people in foreign countries. That is why real money was such a breakthough; it allowed people to trade, easily, with people they didn’t know and didn’t trust.

A fool might be able to make a pair of clumsy shoes for himself in a day’s worth of labor. The shoemaker, spending an entire career at it, can make more shoes… and better ones. Then, the world is a richer place; it has more shoes! Those who don’t participate go barefoot.

This is not a controversial idea. Everybody knows that at the very least, tariffs will raise prices and make Americans poorer. They will be stuck with inferior products at high prices made by bad industries with good lobbyists. That’s already happening in the auto sector.

In this regard, Trump is merely following the Biden administration, which imposed a 100% tariff on Chinese-made electric cars. Even with a 100% tariff, the Biden bunch worried that the cars might still be attractive to US consumers… so they added more restrictions, effectively banning the lower priced/higher quality cars from the US market. Now, Americans pay twice as much for a similar car.

Team Biden argued that China’s cars should be kept out for ‘national security’ reasons. The Emergency Economic Powers Act of 1977 apparently gave him the authority. But where’s the ‘emergency’ on the steppes of Saskatchewan? Where’s the national security risk in Ottawa?

And now, all over the world, people are wondering. Being an enemy of the US empire is dangerous. But being a friend is not much better. Trump is threatening to take Greenland from our Danish allies… and the Panama Canal from our Central American friends.

Friends and enemies alike are now looking for alternatives to US consumers, US products and the US dollar. All have been politicized. Like tourists outfitted with explosive vests, who wants them?

In December the EU inked ‘the largest trade deal in history’ with the Mercosur nations of South America. Thailand did a deal with several European nations. Brussels is negotiating with Malaysia. China has done nine new trade deals since 2017. Even India, normally reluctant to enter trade agreements, is now in talks with the EU.

Only in the Americas does the US still dominate trade. And now, that is in jeopardy, too.

On Friday morning, investors wondered if the president would really do such an imbecilic thing. Maybe it was a negotiating tactic, they asked. But negotiating for what? Nobody seemed to know. Did he really expect foreign nations to solve Americans’ drug addictions… or secure its borders?

Then, when the White House revealed that it was serious about imposing tariffs on long-time friends, stocks sold off. The headlines this morning tell us that Wall Street is ‘bracing’ for more… but who knows?

What we do know is that with so much chaos and uncertainty sweeping the world, investors are looking for safety. Gold glitters, says Dan Denning. The price per ounce went over $2,850 last week.

Cryptopolitan:

Gold makes new all-time high as Trump’s actions weaken the US dollar

The Canadian dollar and Mexican peso tumbled almost instantly while the Oval [office] interview was still going on. US Treasury yields pulled back immediately, and West Texas Intermediate oil futures jumped to $73 a barrel.

Peter Cardillo, a market economist, is betting gold will hit $3,000 an ounce soon. “We see the potential for much higher prices,” he said.

More on gold… tomorrow…

Until then,

Bill Bonner
Contributing Editor, Fortune & Freedom

For more from Bill Bonner, visit www.bonnerprivateresearch.com