MANAGING YOUR MONEY : THE RIGHT PATH : Lessons on How to Ride Out a Recession : Analysts say shell-shocked investors should keep in mind stocks of firms that make things people can’t live without.
Stock prices sink. The inflation rate rises. Recession is in the wind.
Sound familiar? They could be dispatches from today’s gloomy economic front lines--or, just as easily, those from late 1979 or mid-1981, as we slipped into the past two recessions.
Looking at recessions past, say Wall Street watchers, offers investors--many with memories clouded by the long bull market of the 1980s--valuable lessons on how to act when the markets sour.
“Many people are sort of shell-shocked here. They’re doing nothing. They don’t understand what’s going on,” said Arnold Kaufman, editor of Outlook, a stock newsletter published by Standard & Poor’s Corp. “They should be taking (protective) steps, but they’re not.”
A look at the recession performance of various industry groups as tracked by Standard & Poor’s Corp. reveals one trend that investors cannot afford to ignore when evaluating potential opportunities: Companies that make or sell things that people can’t do without tend to hold up better in a recession. For example, in each of the past four recessions, tobacco and shoes have done well, according to research by Merrill Lynch’s Quantitative Analysis Group, while paper and metals haven’t.
However, stock experts warn that historic performance is no guarantee of future performance.
In the 1980 recession, for example, gold mining was the best-performing industry group. But it was among the worst in the 1981-82 recession, as the Federal Reserve fought to bring inflation under control. Gold and gold-related stocks are a traditional hedge against inflation.
Another caveat: Market cycles and economic cycles are seldom in perfect step. Generally, the market will slump before the economy does and will begin to recover before the economy in general.
The conventional wisdom for a recession investor is that so-called defensive stocks--the companies that make things that people have to buy, including food, consumer goods, drugs and household goods--will perform better than companies whose operations are more subject to the cycles of the economy.
But it’s often not just that simple. And, as usual, timing is absolutely critical.
Investors, Kaufman noted, must pick carefully because some of the “defensive” stocks have been selling at a premium “and therefore have lost a good deal of their defensiveness.”
Some on Wall Street even argue that some cyclical stocks, including such basic industries as aluminum, paper and chemicals, have gotten less cyclical in recent years, said Richard Bernstein, manager of quantitative analysis for Merrill Lynch Capital Markets. The reason: Many companies in cyclical industries are carrying less debt and have more inventory controls and more efficient production processes, he said.
But Bernstein advised avoiding many of the cyclical stocks early in the recession “with an eye that, later in the recession, they might be worth another look” as the market rebounds.
The best-performing stock groups during the 1981-82 recession, according to Merrill Lynch, were brokerages, manufactured housing, alcoholic beverages, department stores, and savings and loans. The worst were various oil-related groups, steel, coal and diversified machinery.
That recession’s biggest losers were primarily cyclical industries, with oil suffering because of overproduction coupled with sluggish economies worldwide. The winners were a mixed bag of defensive stocks and special situations.
Brokerages did well because the market typically bounces back before the economy does. Manufactured housing was up partly because home buyers dropped down to that cheaper form of housing and also because interest rates fell late in that recession as the Fed tried to stimulate recovery. Similarly, department store and S&L; stocks spurted near the end of the recession as investors anticipated the economic recovery and credit surge it would bring.
This time, Bernstein said, his favored stocks include utilities and energy-related issues.
Utilities are low on the list of Eugene E. Peroni Jr., director of technical research at the Janney Montgomery Scott brokerage firm in Philadelphia.
“People normally go into utility stocks because they are seeking safety and yield,” he said. But safety is questionable for several utility stocks these days, and the dividend doesn’t mean much after you look at the appreciation potential of the stock itself, he said.
Peroni likes food-related stocks (including Quaker Oats, Ralston Purina and Sysco) and oil stocks (particularly Mobil) as oil prices soar.
The underlying advice to investors from several advisers is to accept and prepare for the brutal realities of a recession market that are just beginning to make themselves felt.
“Batten down the hatches,” Bernstein said. “In terms of earnings and just how bad they can get in a recession, people just aren’t ready.”
WEATHERING THE STORM
Standard & Poor’s industry group average performance for the last four recessions. Winners Manufactured housing: +36.5% Gold mining: 35.9% Entertainment: 26.3% Retail dept. stores: 17.7% Shoes: 17.7% Coal: 17.7% Retail food chains: 17.4% Tobacco: 16.6% Household furnish./apparel: 15.6% Savings & Loan Assns.: 14.3% Losers Computer and business equip. (except IBM): -18.3% Heavy-duty trucks & parts: 18.0% Oil & gas drilling: 17.1% Machine tools: 14.9% Conglomerates: 11.8% Oil well equip. & services: 11.5% Aluminum: 11.3% Oil, domestic integrated: 11.0% Cosmetics: 10.8% Banks: 9.7% Source: Merrill Lynch Quantitative Analysis Group
