Don't Fear "The Ides Of March"… Just Follow These Simple Anti-Recession Tips
Smart Profits Report Issue #505
By Martin Denholm
Managing Editor, Smart Profits Report "Beware the Ides of March." So said a wise soothsayer to Julius Caesar in the famous Shakespeare play, warning him of impending doom. Caesar scoffed at him - and of course lived to regret it when he paid the ultimate price. Fortunately, March 15 (the Ides day itself) falls on Saturday this year, so there's no chance of any market madness on that specific day. But there are still plenty of modern-day financial soothsayers warning investors about all kinds of perils. One prime example: The constant chatter about whether or not the U.S. economy has slipped into a recession. So let's first poke some fun at these folks, then I'll show you how it doesn't matter if we're in a recession, as long as you know how to profit from it. Two Reports Arguing Recession As the Federal Reserve was busy pumping another $200 billion into the financial markets, two other groups were proudly releasing their latest research. A Bloomberg survey of 62 economists concludes that the current economic downturn will be worse than previously forecast and the recovery will be slower and weaker. Specifically, they forecast a measly 0.3% annualized GDP growth rate from January-June (0.1% during Q1 and 0.5% during Q2) - 0.5% less than they projected just last month. How times change, eh? With consumer prices set to rise by 2.6% this year, consumer spending (which accounts for two-thirds of GDP growth) is only expected to rise at a 0.5% annual rate during the first quarter - the weakest since 1991. With that poor start, full-year GDP growth is expected to hit just 1.4% - the lowest since 2001 - and the group pegs the chance of a recession in the next 12 months at 50%. Next up, the quarterly UCLA Anderson Forecast. While noting that the credit crisis, a slumping real estate market, weaker job growth, and inflation is stifling consumer spending, the group takes a more contrarian view to the consensus and doesn't see an official recession. It projects 1.5% GDP growth this year. If you're wondering what this means and how it affects you, I have a simple answer… Don't Be Scared Of The Big, Bad Recession. While some folks obviously think it's fun to predict recessions, it doesn't actually mean much for investors. "But, wait… everyone is talking about it. That must mean it's important, right?" Not really. Recessions are a normal part of most economies and it doesn't mean the sky is falling. In the U.S., a recession is generally categorized as two consecutive quarters of declining GDP growth. And contrary to the doom-and-gloom merchants, it certainly doesn't mean you should hit the "Sell" button. For example, the U.S. economy has endured 11 recessions since 1945 (this means they were called by the National Bureau of Economic Research - the only group that officially declares recessions). But the stock market actually went up during seven of them, according to the Hulbert Financial Digest. Remember, recessions can often occur because of particular weakness in one or two sectors, not everything. For example, in 2001, tech stocks led the way down. This time around, you could point the finger at real estate or financials. But it's still possible to stay invested and make money. Here are a few simple pointers. Three Recession-Busting Tips - "Flight To Quality": Whenever you hear this term, it's most often associated with the gold market - a great hedge during economic downturns, high oil prices, a deflated dollar, and high inflation. And hey, presto! We have all four of those scenarios today. Oil prices are setting new records almost daily and just hit $111 a barrel, the dollar set a 12-year low against the Japanese yen, and gold responded by hitting a record high today; finally breaching the key $1,000 an ounce mark.
Gold is a solid investment, for sure - and it's a market that my colleague and commodities guru Lee Lowell will be touching on regularly in his new bi-weekly "Commodities Corner" feature, starting here next Monday. But it's no surprise to see gold ETFs and many gold stocks hitting new highs at the moment. New highs are bullish and the gold market certainly has some serious momentum right now.
- "Flight To Quality" - Part II: It's not just gold that holds the "flight to quality" tag. In times like this, it's wise to consider big companies that have been around for years and have weathered many financial storms. Not only that, they do so strongly because they have sound businesses and plenty of cash. And if they pay dividends and/or are well diversified outside the U.S., even better.
Take healthcare, for example. My colleague Marc Lichtenfeld is an expert in the field and has talked here before about its excellent, "recession-proof" nature. It's simple. No matter what the economy is doing, people will still get sick and still need medication. And that means a ton of repeat business. Check out his column on investing in Healthcare during a bad economy.
Speaking of diversifying, if you want to grab a slice of many different international companies in one investment, consider ETFs that invest solely in foreign firms. This includes the SPDR S&P World ex-US ETF (AMEX: GWL), or the Vanguard All-World ex-US ETF (AMEX: VEU), which holds 2,200 stocks in 47 countries.
On the other hand, be wary about investing in companies that rely heavily on discretionary consumer spending. I'm talking about companies that specialize in selling expensive "big-ticket" items, certain retailers and restaurants. As consumers feel the pinch and the job market continues to struggle, many will cut back on their spending in these areas.
- Fatten Up: One topic getting an increasing amount of attention these days is a so-called "agri-boom." With the global population growing, so too is demand for life's everyday essentials. And in the commodities world, supply and demand is a key driver of prices. Not only are we seeing huge moves for oil, but prices for corn, wheat and barley are also rising - something I talked about here back in December.
If you don't want to invest in these markets directly, you could play the trend by investing in food producers and food sellers, as they're being forced to pass on higher prices to consumers. Two of the best to consider: Tyson Foods (NYSE: TSN) and Kraft Foods (NYSE: KFT). Again, make sure you check out Lee Lowell's new commodities column - he'll fill you in on the major movers and shakers in the sector and show you where prices are headed next, so you know how to profit. Take care until next time... Martin Denholm Today's Smart Profits Notes: - Despite an early plunge, stocks recovered by the end of today, following a report from Standard & Poor's, who predict that financial firms are nearing the end of their massive write-downs. According to the firm's latest projection, the total amount of subprime write-downs is now projected to hit $265 billion. But investors seem to be clinging to the hope that the pain is almost over. A solid prognosis, or merely a bear rally? Time will tell. But given Wall Street's fickle nature and the fact that the Fed's various stimuli have only worked for brief periods, it might not be time to pop the champagne just yet. Not with oil prices and the U.S. dollar continuing their huge upward and downward moves respectively today.
- As an English guy, one phrase I've never quite got used to since living in America is, "My Bad." Spoken when the person is at fault for something, it just sounds odd to me! But Nike (NYSE: NKE) is going one better. Actually, that's "My Better." The firm has just launched its new line of Nike Sparq Training, with a multi-media campaign, entitled "My Better." Comprising of clothing, footwear and other equipment, the range is set to go head-to-head with the original creators of similar products, Under Armour (NYSE: UA), whose dominance and market share in the area might be about to dwindle, given Nike's rock-solid brand and boatloads of money.
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