Economists are generally an optimistic bunch. A lot of them would not speak the R word unless it is staring them in the face. The Institute of Supply Management (ISM) service sector report shows a drop in business activity, first such drop in nearly 5 years. This has caused some economists to finally agree that Recession may already be here.
On this site we insisted that the recession is already here, even though it may be in pockets, in an earlier article.
Wasn’t this also the message the feds were sending when they aggressively started cutting the interest rates. The message was, as I saw it, that recession was now a bigger threat to the economy than, say, inflation
Recessionary cycles are normally self correcting, the only question remains how quickly will the economy turn. Since this time around the genesis appears to be in the credit markets, it is logical (and indeed happening now) that the credit will become scarce for most except the most credit worthy businesses.
These are the times when the mind wanders in the direction of asset preservation rather than growth. Nothing wrong with that.But remember, Toyota continued to grow as a company throughout the decades that Japan has been in its extended recession
What should an investor do in recessionary times?
First of all, if you are a patient value investor with a long time horizon, the best advice is to wait it out (or rather be opportunistic and add to your holdings). Here I assume that you do not depend on your portfolio for your living expenses
If you are a short term speculator (technical traders), than you need to be careful as the volatility trends that you may have come to rely on may not work as well. Bankruptcies, sudden changes in fortune, etc are singular events which can distort any system that you may be employing.
For most though, it may be wise to evaluate what companies you may want to remain invested in. Besides looking for undervalued securities, you should look for companies with the following characteristics
- Cash flow generating companies with highly rated debt. These companies have flexibility to manage their operations and cash based on the economic environment
- Cash rich companies
- Companies with a diversified product portfolio, that includes what may be necessities for most people to live on
- Companies that are geographically diverse
- And strong companies in weak sectors, where new market share can be gained
These are the kind of businesses that will not only survive recession but can come out stronger
Additionally, you may wish to look for a good dividend yield, which you should promptly reinvest. Most brokers now offer free dividend reinvestment so this should not be a problem. One of the benefits of this recession is that the low taxes on dividends in US are more likely to continue
Many of the established consumer staples and pharmaceutical companies qualify according to these guidelines. My favorite in this sector is Johnson and Johnson (JNJ)
Some financials also qualify. Bank of America (BAC) is my favorite
There are two other types of companies that can do well but may be for a slightly more adventurous investor.
- Companies that make their profits preying on weak and restructuring them. Leucadia National (LUK) is one. American Capital Strategies (ACAS) is another one with a very attractive and increasing dividend yield to boot
- Companies that make money insuring risk. Markel (MKL) is one speciality insurer I really like, if only because they have excellent investment credentials in addition to a top notch underwriting team
Added benefit is that all these companies currently trade at an attractive valuation.
I will be interested to know what you think and what steps you are taking (if any) as we settle into this winter of recession
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Good article. Another form of investment that you could look into during time of recession is Forex Trading. As all currencies are traded in pairs, it doesn’t reallymatter what the economy is performing.
forexdiscover’s last blog post..Technical Analysis in Forex Trading
Thanks forexdiscover! Doesn’t the exchange rate kinda depend on the interest rates set by the respective central banks AND the rate of inflations in the respective country? Atleast that is what I remember them teaching me at the B-school
This is the first time I’ve been “financially aware” to be able to take advantage of the cheaper prices of a recession. I’m kind of excited actually, but I hope I don’t get too excited
Thanks for the info of what to look for. JNJ is on my shopping list as well…
mariam’s last blog post..Investing in what the insiders buy
Isn’t the definition of a recession 2 consecutive periods of negative economic growth? We haven’t even had one period of negative growth. We are definitely in a slow down, but not a recession. You know who will put us in a recession? People who keep saying we’re in a recession, mainly the media, as it freaks people out and then their spending habits change throwing us into an actual recession.
Mommie’s last blog post..The Examples We Set
@Mommie:
True that is the ‘official’ definition, however this is a lagging metric. A recession is proclaimed when 2 consecutive quarters of negative growth is observed but recession really starts way before these numbers confirming it come out.
Good news is that generally by the time experts agree that we are in recession, the economy has already started to pick up. That is the recent history atleast
I’m still sticking with economic slowdown, as we haven’t had one quarter of negative growth. Lagging metric as it may be, it’s still a metric based on actual results of previous quarters, and previous quarters thus far haven’t been negative.
Obviously I’m hoping for no recession:-)
Mommie
http://www.mommieshome.net
Mommie’s last blog post..Contest for February
@Mommie: I am hoping, and indeed expecting, a quick recovery too. And I hope you are right and I am wrong