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In
Case of Recession, Do This... |
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The
'R' word. We're hearing it a little more every day, and probably
for good reason. The sheer idea of it strikes fear into the hearts of even
the most experienced investing veterans. Here's a question for you though....will
it matter if we do enter a recession? Seriously. If and when
the time comes, do you really have a pre-determined course of action
you'll be taking? If you don't, then what does it matter if we
do
enter a recession?
OK, the question
was mostly for effect, but it wasn't entirely hypothetical.
We're assuming
the most common answer to the question would be "I'll get out of the
market." That's understandable. However, if you wait until we're officially
in a recession to get out of the market, it may be too late
then. (We'll just refer you back to the last twelve months if you're
wondering why. We're still not technically in a recession yet, but stocks
have been sacked.)
In fact, getting
out of stocks at the onset of a recession may well be a way to make
things even worse. Why? As much as we cringe at quoting
Jim Cramer, his mantra is basically right - there's always a bull market
somewhere.
That's why the
research staff of the Micro Cap Press did a little research on recessions.
The goal was to find where those bull markets were during the last couple
of official economic contractions, as defined by the National Bureau
of Economic Research (or NBER)
The good news
and
bad news is, there have only been two technical recessions since the 90's.
The first one occurred between July of 1990 and March of 1991. The second
one lasted from March of 2001 to November of 2001. Before that, the most
recent ended in 1982, but we don't have complete market data that far back
anyway.
 What
we're looking for first is any sector or sectors that actually
thrived during these two time frames. After that, we'll drill down
into any individual industries that may have been bullish during
those periods.
The nearby chart
highlights each sector's performance beginning on the official date of
the 90/91 recession. By the end of the recession, healthcare and
staples
were leading the pack neck and neck. Each one gained about 16% for
the period. No surprises there - both are pretty defensive. In third
and fourth place were energy and utilities, each gaining about 5%. Again,
both are relatively defensive, so it's not a big surprise to see them
make good progress in a bad market.
 Now
let's fast forward to the 2001 recession.
The nearby chart
restarts the clock in March of 2001. Interestingly, stocks - pretty
much all of them - were on the rise after the recession started.
They all faded a few weeks later, but by November of that year healthcare
emerged
as a leader, gaining 6.3% for the eight month period. Basic materials
were close behind, gaining about 6.1%.
Clearly this
recession didn't produce as many winning groups, nor were the winners all
that great. However, it's not like all hope was lost. In fact, there
were four sectors out of the eleven that essentially broke even, not
counting the two distinguishable winners.
The point is,
don't
buy into the notion that you can't make money in a recession. You can
- you just have to know where (and how) to look.
The study gets
even more interesting when you start drilling down into individual industries.
Keep reading.
They say birds
of a feather flock together. It's true for the stock market as well.
 Even
within a sector-based trend there's usually a leading industry or group
of stocks. If you can identify those precise leaders within a sector
at any given time, it may be possible to further enhance your returns...even
during a recession.
So which
industries have fared well in tough economic times? We doubt we looked
at every single one of them, since there are hundreds. However, we did
narrow our list down to the most important ones, to add some detail to
the study.
During the 90/91
recession, though there was no clear sector leader, there were several
unsurprising leading industries. Between July of 1990 and March of 1991,
the leading industries were (in order) tobacco (+20%), soft drinks (+19%),
personal products (+17%), pharmaceuticals (+15%), healthcare supplies (+13%),
packaged foods (+12%), and healthcare facilities (+10%).
 All
of them were defensive in nature, and typical strong performers in a poor
market.
And what about the second recession in question? From
top to bottom, the industries that gained ground between March of 2001
and November of 2001 were footwear (+34%), metal and glass containers (+33%),
aluminum (+28%), specialty stores (+25%), motorcycles (+23%), home furnishings
(+21%), and healthcare facilities (+15%).
Remember
the winning sectors in 2001? They were healthcare and basic
materials, apparently led by healthcare facilities, and aluminum/metal
containers, respectively. The other four leading industries were
slightly unexpected ....specialty stores, motorcycles, furniture, and
footwear.
The only real
commonality between the two recessions was healthcare, though you
could make the argument that energy and basic materials are close enough
kin to expect either or both to do reasonably well in a contracting
economy.
You don't
have to bail out of the market completely just because we're in a recession.
You
may have to select stocks carefully, but you don't have to fold. In
fact, you can do quite well when most everyone else thinks it's
impossible. You just have to go find the leaders.
 Obviously
that prompts the $64,000 question "How do you find those leaders?"
The methodology
is more about observation and less about fundamentals. In
a nutshell, you simply have to find industries that are able to make consistent
gains for days and weeks on end. Be patient - they'll show up in
plenty of time to take advantage of them.
As an example,
remember
the ranking methodology we introduced a few weeks ago? On
September 1st we stacked up all the major industries based on their
one-week performance, but were mostly interested in their two-month
results. (Think of it as a one-week/two-month cross check.)
The quick glance
at the time dug up emerging leaders like glass/metal containers, specialty
retailers, and packaging stocks. And, over the course of the following
six weeks those groups were indeed the leading groups. By late September
the market was in a freefall that no industry could escape, but the strategy
did prove to be fruitful in a normal environment (and has proven fruitful
prior
to the September 1st analysis as well). In short, it works.
Now that the
market's dust is starting to settle, we'll start to provide regular updates
on which sectors and industries are starting to accelerate upward. We believe
this strategy is an effective way to overcome what could otherwise be
a frustrating period for investors.
Back to the
main point though - don't abandon the ship. These choppy market
waters can be navigated profitably. Check out the blog over the
next couple of days, as we'll be doing the very analysis we just described.
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Updated: 9:18 am PST (17:18 GMT), January 5, 2009
