With the S&P 500 down nearly 10% year-to-date, the price of oil crumbling and economic growth that slowed to a trickle in the fourth quarter of 2015, many observers -- Wall Street and otherwise -- are wondering: are we on the cusp of another recession?
To be clear: we are not in a recession. Though 72% of Americans believe otherwise, the Great Recession ended in June of 2009.
And despite the fear and confusion swirling amidst the current market volatility, many investment pros would argue that we're not about to re-enter a recession, either.
"We continue to believe that a US recession is unlikely in 2016 and that the S&P 500 will rise to 2100 by year-end," Goldman Sachs analyst David Kostin wrote at the end of January. The slide in equity prices, he said, indicates that investors believe that a recession is on its way, but Goldman economists disagree. They "estimate that risks to the US economy from a further slowdown in China are limited, and that the negative effects of lower oil prices will be offset by benefits to the consumer," he said.
Kostin isn't alone in this view: in a macro economic research note released on Monday,
"We do not believe the U.S. is entering a recession. Our confidence is bolstered by labor data, which shows a healthy underlying economy," he writes. Though "recessionary signals abound" -- like high yield spreads that are consistent with prior recessions, or declining profit margins in corporate America -- Glionna and his team believe that these are false signals for the economy at large. "Labor markets provide the best real time indicator of economic activity," he writes. "And labor markets are solid."
That said, Glionna and his team recognize that investors might want to prepare for either scenario -- recession or sustained recovery -- so alongside his proclamation that the U.S. does not seem to be headed for another recession, he's provided a choose-your-own-stock-adventure. Down one path is the playbook for surviving an economic downturn; down the other, a stock guide for riding a recovery. Here's a look at what he and his team recommend:
The Recession Playbook
Glionna explains that consumer staples, healthcare and telecomm are the best places to seek refuge when the economy is entering a recession, as the industries that tend to do best are food and beverage, tobacco, household/personal products, and healthcare equipment/services. This makes sense: if wallets have to tighten, consumer spending on things like technology and travel will drop but at the end of the day people still need to eat and take care of their basic needs.
This should be obvious, but Glionna also notes that investors gravitate towards stocks with lower volatility when recessions begin. Therefore, the best recession playbook would, in his view, overweight consumer staples, healthcare and telecomm while also looking for companies that have high profit margins and stocks with low volatility.
Using those parameters, Glionna and his team found 30 names that would serve investors well in a recession. Among the 30:
Here's a look at how the list of 30 has performed since June:
The Recovery Playbook
If the U.S. is not entering a recession, your stock strategy should be a little bit different, Glionna says. The best-performing sectors in previous recoveries have been energy, materials, industrials and consumer discretionary, because industries that have done well are consumer durables and apparel, automobiles, transportation and banks.
What's more, Glionna says, value, high dividend yield, and high debt-to-capitalization are some of the investment styles that have done well around the end of the last three recessions. Therefore, the best recovery stock playbook is one that overweights energy, materials, industrials and consumer discretionary while also looking for value stocks, companies with high leverage and stocks with high dividend yield.
As he did with the Recession Playbook, Glionna found 30 stocks that fit the above parameters. Among the winners: Caterpillar, Ford, Kohl's, General Electric and Viacom. Note: these stocks have not performed well recently. Caterpillar is down 8% year-to-date; Ford, 15%; General Electric, 7%. Kohl's and Viacom, though, are both up: Kohl's has gained 4% year-to-date while Viacom has jumped 11%. Among the list of 30 names, however, they're ouliers. This is how the recovery list of 30 has performed since June:
The Takeaway
Though the Recession Playbook looks better right now, Glionna and his team don't recommend following it -- because, simply put, they don't foresee an economic slowdown in the near term.
