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Recessions:
Rough For Some Stocks, Not Too Bad For Others |
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Let's
take a small side trip today, and instead of focusing on specific small
and micro cap news we'll take a good look at an economic reality. That
reality? The next few months may not be the best few months for
many stocks. We're now more than five years into a bull market,
and more than six years removed from the end of the last recession.
In other words, time is catching up with us. That could be good
news
though, as you'll see.
 The
research staff of the Micro Cap Press isn't the decision-maker when it
comes to picking an official beginning or end of a recession. The
same goes for a bear market - a 20% decline in stock prices is generally
accepted as the definition of a bear market, but no committee calls the
top or bottom. However, in both cases, the evidence is mounting.
The good
news? Not all stocks do poorly in a recession. In fact, not all stocks
do poorly in a bear market (a bear market and a recession are not the
same thing). As such, being in one and/or the other isn't a cause for
panic - it's just a reason change tactics.
It's not our
goal to preach gloom and doom, though we do nobody any favors by pretending
everything is rosy. Our only goal is to present our case as we see it,
and then explain what investors can do to defend against - or
even thrive in - a tough environment.
Way back on
September
10th of last year, we took a look at the effectiveness (or lack
thereof) of certain economic data sets when used as stock market indicators.
We determined most of the highly-touted ones really weren't helpful
to investors. A select few, on the other hand, were powerful tools
when
interpreted correctly.
The conclusions
from that commentary were simple....the key economic data sets we're interested
in as investors only include the unemployment trend, the capacity
utilization trend, and the sentiment/opinion trend. At the time
we featured the Michigan Sentiment Index as our opinion gauge, but we've
decided that the Conference Board's consumer confidence figure may
be better suited for the job.
Those three
pieces of data were chosen based in their consistent correlation with stock
market trends; no other data set really offered the same...at least not
in way that can be interpreted or quantified.
 What
do all of those tools look like now? Two words - not good.
Unemployment
is trending higher. It has been for months. Last month's reading of
4.9% is a tad lower than the previous month's level of 5.0%, but the trend
is still intact. The last time we saw unemployment trend higher was in
early 2001. You already know what that was the beginning of.
Capacity
utilization is trending lower, and has been for months. We saw a lull
in late 2006 that could have potentially been thwarted (and was for a while).
But, the utilization level never even got back up to its prior peak before
it rolled over again. The last time we saw capacity utilization sink this
badly was - you guessed it - mid 2000.
Consumer
confidence is trending lower, and like the other two pieces of data,
has been for months.
This is actually
kind of a tricky piece of data to utilize. Short-term surges and troughs
in confidence actually tend to occur at short-term peaks and bottoms for
the market. So, it has a role as a contrarian tool.
When the short-term
symptom
turns into a long-term epidemic though, then you know the undertow
is changing direction. And, that's pretty much where we are now ...consumer
confidence has been sagging more and more since July - hardly a short-term
problem. It's starting to look reminiscent of 2001.
So, there's
the 'why' behind our philosophy. Is it set in stone? Not
at all - you'll have to weigh the odds of continued weakness for yourself.
As for the 'what to do if', keep on reading.
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The
Horse(s) For The Course |
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Where's the
best place likely to be if we really do slip into a recession? Since
the obvious answers aren't always the right answers, we took a scientific
approach to the matter - we found out for ourselves based on what did well
during the last two recessions (7/90 thru 04/91, and 02/01 thru 11/01).
As much as we'd
like to look at recession-proof sectors today, we'll have to save the discussion
for another time. Today's focus is going to be on market cap. We'll
give you a hint though ...utilities, energy, healthcare, and consumer
staples are on the list.
 As
for market cap, the results on the nearby table speak for themselves. In
general, small caps fared a little better than their large cap counterparts.
The difference
isn't big enough to worry about, you say? Well, we won't entirely
disagree.
However, the results during a recession are only half the story.
We'll round out the other half in a moment. First, plant this seed in the
back of your head - nobody really knows when a recession is over until
it's well beyond over.
The National
Bureau of Economic Research (the final authority on the matter)
finally came out and said in November of 2001 that March of 2001 was the
peak of economic activity and the beginning of a recession ...eight
months after the fact. The irony is that November of 2001 happened
to be the end of the recession - when they were getting around
to calling the beginning of it. They didn't announce the recession
was over in November of 2001 until July of 2003...almost two years later.
 What's
that got to do with anything? Check out the next table; it shows you
how each of the same market cap groups did over the 24 months after the
recessions officially ended. Those results speak for themselves too.
Conclusion:
Small is relatively good during a recession, and great afterwards. Based
on history, we may be entering a period to start migrating away from large
caps and into small and micro caps. There's a possibility the absolute
trough in economic activity isn't too far off. If so, stocks may not be
too far behind.
That's not
to say today's modest attempt at strength is a sign the economic or market
bottom has been made. Today's marketwide bounce was simply that - a bounce,
and mostly the result of days and days of weakness. It may well be temporary,
especially considering the fade late in the session. However, we do find
it interesting how small caps and micro caps have emerged as leaders within
the last few days...in the midst of substantial challenges for the market's
bigger names. Could the underpinnings be turning as we enter a recession
or bear market?
To be clear,
rules of discipline and common sense still apply. A nasty enough correction
can sink any ship no matter how unsinkable you think it might be, and the
market appears to be pretty vulnerable to a bear market right now. So,
careful selection of small caps is still prudent if you decide to move
in that direction. Based on what we see though, the long drought for many
small and micro caps may be nearing an end.
If you've read
this far, then you really do need to read our final thoughts...
This discussion
is far from over, but most of the heavy lifting has been done. Over
the next few weeks we'll provide updates to today's write-up about where
we are on the economic and market timelines. Stay tuned.
You'll also
notice we specifically didn't discuss market cap results during
bear markets, which may or may not coincide with recessions. We'll
get to that topic soon; the recession overview was the more pressing of
the two. We also intend to add in the missing piece of the pie - sectors
-
soon, so be on the lookout for that newsletter as well.
By the way,
you may want to check out our
blog if you haven't lately. We've found three stocks working on potential
breakouts.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
