Though I am a bull at heart, I am most certainly a realist. At this point it isn't a foregone conclusion that the economic recession is here, but the chances have certainly risen to more than 50% that we are either already in a recession or will be in one in the next couple of quarters. For a while it was just the housing starts, but now the economic data outside of the housing starts has begun to crack. The point of this post is, if the recession is coming, what kind of stocks should you be in?
The typical response to a recession is to be in lots of consumer non-cyclical names that are consistent growers and will grow regardless of the economic conditions around the country and the world. Some of the most common recession-proof stocks picked by the pros are Coca Cola (NYSE:KO), Proctor and Gamble (NYSE:PG), and Altria (NYSE:MO). All three of these companies have businesses that have proven to be extremely resistant to any economic pressures that affect many other businesses so greatly. The question here though is since this recession has been predicted for so long, has the average investor already missed out on their opportunity to pick up defensive names? This is certainly up for debate at this point.
My personal view of this question is that one must look at it this way. The defensive names sport high dividends, which are extremely helpful to investors in turbulent economies. The actual stock price may not see a huge boost because this recession has been predicted for quite some time and it would come as a shock to very few if the economy went into a recession. Even if that is the case that the stock price could be slow to move, a steady solid dividend of 3 or 4% is particularly enticing when one year CD rates are averaging just 3%.
Though I do believe that defensive stocks may be a nice safe haven, I caution investors against weighting their portfolio too heavily into this group. The fact is that wall street always has and always will look out to the future. This means that as soon as we realize there is a recession, the markets may bottom and look toward the future turnaround possibilities, in which case the defensive stocks look less attractive.
Given that we have no idea how severe of a recession it could be, adding some defensive names makes a lot of sense, but don't overdo it.
» Stagnation, Inflation and Recession: A Downward Spiral from Know More Media
For months now there has been anxiety about recession. The stock market is extremely volatile, the mortgage industry is in a horrible slump, as is consumer confidence, and there is increasing concern about US dollar loosing value. According to... [Read More]
Tracked on: March 3, 2008 2:44 PM | Permalink to Trackback