Recession or Depression? A Look at the Statistics

One should ask if we are entering a recession at all. Industrial sector insiders don’t seem to think so, as they are still buying stock in their own companies. The industrial sector is made up of any business generally associated with manufacturing. These companies are primarily machinery or equipment producers. On the whole, the industrials sector is closely associated with economic growth, since it provides the machinery for manufacturing. If manufacturers are experiencing a slowdown, they’re not going to order more machinery. In 2007, these insiders were still extremely bullish, in spite of sluggish growth of the US GDP (Are We Entering a Recession?).

If history has taught us anything, it’s that patterns repeat themselves, and tracking recessions is no different (Get Prepared for Recession). Right now, there are three signs that we are headed for—if not already well into—a recession:

First is the continuing fallout from the subprime mortgage fiasco. Too many low interest adjustable rate mortgages were given to people who simply cannot pay them back under present conditions. The need to unload these homes before the banks repossess them has created a surplus of homes and condos on the market, dropping prices rapidly.

Next there’s the sky-high price of crude oil. Pushed upward by increased rumors of war in the Middle East and high demand from developing nations like India and China, increasing energy prices act as an inflationary “tax” on domestic production and consumption throughout the market economy.

Finally, the continuing decline of the dollar caused by the Iraq war and oversupply of dollars generated by the Federal Reserve (Three Reasons the US Faces Recession in 2008).

If there were any lingering doubts that we are not in a recession, a look at the unemployment rate should dispel them. In February, the US lost 63,000 jobs, the biggest drop since the Iraq war began five years ago. With people out of work, they can no longer buy much of anything, much less pay their mortgages, which means more trouble for banks as people continue to default on their home loans. (US Recession: The End of the Argument). Beyond the mortgage crisis, we are beginning to feel the early shocks of a wider-spread credit crisis, with credit card companies holding US debt of $957 Billion.

The annual Equity Gilt Study from Barclays Capital, known as “the bible of stock market optimists” since it was first published in the 1950s, has always shown that, over extended time periods, shares are the best investment. But not this year. Between 1987 and 2007, UK equities returned an inflation-adjusted 6.7% a year, compared to gilts’ 5.1%; over 50 years, shares have gained an annual 7.2% in real terms, compared to 2.4% for gilts.

The study underlines that reinvesting dividends is crucial. A hundred pounds invested at the end of 1945 would now be worth £296 in real terms without reinvesting income; but consistently doing so would lift the return over the period to £4,577. For gilts, the respective inflation-adjusted results, starting with £100, would be £2 and £158. The Gilt Study also reports what other experts have been saying: That rapid industrialization in the developing world, combined with limited supply, has pushed inflation higher. All this predicts the beginning of an era of smooth, non-inflationary growth (Investors’ Bible Predicts Doom).

It isn’t necessarily all gloom and doom, however, as those who track investor sentiment are hopeful that current signs point to a stock market rally in the coming months (Sentiment Indicators Say Buy Stocks Now). The stock market is actually still particularly bullish right now, and this trend is expected to continue for the next few years (We’ve a Long Way to Fall Yet).

How to Recession Proof Your Portfolio

It may sound crazy, the stock market often rises during recessions. According to the National Bureau of Economic Research (NBER), the U.S. has suffered 11 recessions since the end of World War II, and data from these recessions show that large blue-chip companies hold up better than the S&P 500 or the tech-heavy NASDAQ. So start buying those blue-chip stocks now (How to Make A Recession Work For You).

So when should you buy? A typical recession lasts less than a year, and stocks will generally start to rebound during the halfway point. You make money in the stock market when things go from bad to less bad. In other words, you make money in stocks buying the middle of a recession, not the beginning. (Recession Investing: The Right Time to Buy).

So what is the safest and best place for your money in a recession? According to Jim Owens, CEO of Caterpillar (Dow:CAT) it’s overseas. The tractor and bulldozer manufacturer continues to see exceptional growth outside the US, especially in industries like mining, oil and gas, electric power and marine engines. And all in spite of falling sales in the US caused by the decimated market for new homes.

The Best Recession Investment Stocks

So where are the great recession buys that will allow you to profit from the economic downturn? The answer may surprise you. This very moment, there are two sectors of the stock market that are as cheap as they’ve been in 17 years. These sectors are banks and homebuilders. Things look bleak for those two sectors right now, but just imagine: If you had bought bank stock at the beginning of 1995, in two and a half years you would have increased your money by 250%.

The story is similar for homebuilders… Homebuilders are as cheap as they’ve been since the last major recession some 17 years ago. Again, you’d have made four times your money in two years and six times your money in three years, if you had bought homebuilders the last time they were this cheap. Unless you believe this is the beginning of the end, these seeming losers will become great buys very soon when things start to rebound (Great Buys Now . . . Unless You Believe in Armageddon).

Here’s another great buy from another unlikely candidate for recession-proofing your portfolio: Credit card companies. Here’s how the credit card business works: You lend money, unsecured, at high rates of interest. All the profits come from the poorest, most vulnerable customers with the worst credit ratings. These people are very vulnerable to a recession, and will likely keep right on using their credit cards, especially if they have hit hard times due to layoffs and other difficulties. Therefore, credit card companies are likely to continue to do very well during recession (Broke Borrowers Are Best).

With the risk of falling stock prices, it’s good to know there’s one thing you can count on. That area is the Access Flex Bear High Yield Fund (AFBIX). The AFBIX is a special kind of fund that tracks financial insurance, which investors buy to protect their portfolio’s against loss. When the stock market is rising, this insurance is very low, but when investors start panicking during a recession, the cost of this insurance starts going up, as does the value of its own shares. So when times are tough, buy shares of AFBIX (Our Secret Weapon: What Goes Up When Nothing Else Will).

Things are no better across the pond in England. Not too long ago, British investors were hopeful that the steady housing shortage would cause home prices to rise forever, but not so now. British banks are suffering loan fallout as well, but there is hope. Not all stocks go down at once, and there are a few that are bucking the downward trend. Experts are hopeful that commodities prices will continue to rise due to short supply and increasing demand, while looking for opportunities in the booming agriculture sector (2008 Will Be a Tough Year—But There’s a Silver Lining).

Getting Through the Recession

Those more entrepreneurial-minded will get some inspiration from two stories of foreign businesses that made it through a recession and became more successful than ever. A British sky chalet operator turned his dream into a booming business in spite of an economic downturn (How I Survived Recession), and a Dublin man who grew up in his family’s tailoring business and eventually relocated and began offering ties, shirts, and pre-made clothing (How I Tailored My Business for Recession), all the while weathering a recession. Their secret: Listening to and anticipating what their customers wanted, and then giving it to them. This just might be the key to business success no matter what the economy is doing.

Where Are We Headed Next?

So what happens now? How long will this recession last, and is there hope for the almighty dollar? Many insiders think there is.

A quick look back at recessions past will show us where, when and what to buy. In past recessions, homebuilders stocks soar just before housing prices bottom, and the same setup is happening now. According to the signs, we should buy shares in homebuilders now, or at least very soon (Where I See 500% Plus Gains in the Next Four Years).

Looking over the statistics from past recessions can also give us a clue as to how long the current one might last. A look at how the stock market did back in 1987 shows interesting pattern that we can apply to our current financial situation. In 1986, a mini-crash occurred during a huge private-equity, merger, and buy-out mania, sponsored by Michael Milken’s junk bonds. We’re surfing on a similar wave of deals now. By August 1987 the Dow had gained 54%, and conditions then and now are very similar (Why the Dow Could Rise 54% in the Next 12 Months).

There is strong historical evidence to suggest that the Fed interest rate cut will cause the dollar to rally, and rally hard (The Next Move in the Dollar). There are also three indicators that will tell you if the greenback is headed for an upswing. The first is gold, which is a smaller market than the one for currencies, and is therefore more nimble. The second is the CRB Raw Industrial Index (CRB RIND), which is made up of twenty-two obscure materials including burlap, rubber, print cloth, scrap metal, tar and butter that are essential to the production of most daily goods. Factories buy these commodities at the early production stage, so they serve as early indicators of changes in business activity. The third indicator is the Baltic Dry Index, which is an assessment of the cost of moving raw materials such as iron oar, grain, and coal by sea. Shipping is a good indicator for how the global economy is doing, and there is a strong correlation between the Baltic Dry Index and the value of the dollar. Experts expect the dollar to rise versus the euro (This Smart-Money Indicator Points to a Dollar Rally).

Last year, Wall Street was buzzing with the news when a handful of the wealthiest and most successful investors of the last thirty years announced their desire to sell their companies’ stock. This could mean either that it’s time to invest in those companies, or show signs of a market top. The thing to remember is that these are all blue-chip companies, which are in a multiyear bull run (CNBC’s Explanation is Utter Nonsense).

A look at British businesses, which are less entrepreneurial and more risk averse due to government regulations that make it harder for them to fire underperforming employees, this recession might actually be good for us (Why the Recession is Good for Us).