8/8/2011 2:18 PM ET|
Time to prepare for a new recession
With the US credit downgrade and continued market turmoil, the odds of another recession keep rising. Take a close look at where your portfolio stands in stocks, funds, bonds and gold.
The risk of another recession in the U.S. is growing, and investors need to adjust their portfolio holdings accordingly.
The downgrade of U.S. Treasury debt late last week only underscores the need to examine the investments you own, why you own them and the risk you're taking. The types and amount of domestic and international stocks in your portfolio, and your opinion of emerging markets, cash and U.S. government bonds -- even the reason for owning gold -- all need to be reassessed in order for your investments to thrive in a challenging, slow- or no-growth environment.
"At this point, it's only a question of whether (a recession) has already begun," said David Rosenberg, the chief economist and strategist at Toronto-based investment manager Gluskin Sheff.
Investors clearly believe they already know the answer, given the punishing sell-off in stocks worldwide over the past several days.
And now that debt-ratings firm Standard & Poor's has stripped the U.S. of its triple-A rating for the first time, dropping it a notch to AA+ out of concern over the U.S. political process, both stock and bond investors have yet another imperative to consider new ways to take advantage of less-forgiving market conditions.
"We are not likely done with this correction, as the factors that triggered this sell-off have yet to be addressed, let alone successfully resolved," said Sam Stovall, the chief investment strategist at Standard & Poor's Equity Research, in a note to clients on Friday.
While another recession within 12 months is more likely -- many observers now put the odds at about one in three -- those who believe the economy will escape this mud-stained "soft patch" without a setback may ultimately be right.
Regardless, it's clear that the investing playbook is changing. Here's what you need to know to stay ahead in the game:
1. Review US stocks
Stock investors realize the U.S. economy has been on a slow track, but until last month the overriding belief was that domestic growth would improve over time.
So when the Federal Reserve's stimulus package known as QE2 stopped at the end of June, investors also knew the frail patient would still need help getting around. The hope was that a robust corporate sector would provide support with capital spending and job creation.
Then the picture darkened. The confidence-sapping debt-ceiling debate, Washington's newfound austerity and economic data that cast doubt about the efficacy of QE2 has stoked fears that recession, not inflation, is the gravest threat to fragile U.S. and global markets.
"What we had was an artificial recovery propped up by deficit spending and monetary stimulus," said Rob Arnott, founder of Research Affiliates, a Newport Beach, Calif.-based investment management firm.
"If the private sector failed to have its animal spirits invigorated by the fiscal and monetary stimulus, then the stimulus failed," he added. "And that puts us back into a recession that never really ran its course."
Such a backdrop isn't conducive to either corporate or consumer spending. Accordingly, risk-averse investors are now focusing on the return of capital more than return on capital. Stock and fund buyers are embracing traditional "recession-proof," dividend-rich sectors such as utilities, health care and consumer staples.
Within those sectors, look for companies that have above-average dividend yields, are flush with cash and sell goods and services that people need regardless of the economy. In the best cases, solid businesses can take advantage of weaker rivals to gain market share and emerge from a downturn even stronger.
"A focus on hybrids or income-equity portfolios that generate a yield far superior than what you can garner in the Treasury market makes perfect sense," Gluskin-Sheff's Rosenberg said in an e-mail.
More sophisticated investors can maximize their return potential by reducing exposure to riskier assets such as small, aggressive growth stocks and adopting a bigger-is-better approach, Rosenberg added.
"Relative-value strategies that can go short low-quality and high-cyclical equities while going long a basket of high-quality and low-cyclical equities will be a moneymaker in this environment," he said.
Mutual funds designed to make money when the market loses are also worth considering as a hedge. Jeffrey Hirsch, the editor-in-chief of the Stock Trader's Almanac, favors two so-called bear-market funds, Grizzly Short Fund (GRZZX) and Federated Prudent Bear Fund (BEARX).
Hirsch said he expects further stock declines: "My number is Dow 10,000," he said, referring to his near-term target for the Dow Jones Industrial Average ($INDU).
"Avoid taking any hasty long positions in individual stocks and the broad market," he added. "You can probably buy anything you want cheaper over the next few months."
Still, with volatility and uncertainty swirling, don't take anything for granted. Investors need to keep an especially close eye on their portfolios, as conditions can change quickly. Health care and consumer staples, for example, are two areas to be a cautious about overweighting, as they tend to lag when the market begins another upward move, said Stuart Freeman, the chief equity strategist at Wells Fargo Advisors.
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What's this new recession crap. We never got out of the last one.
I think it's time to start calling it what it really is and that's DEPRESSION.
get ready for ANOTHER recession really? Did not know the first one ended!!!! That show how much those people know about the real world. Typical washington bubble.
In June things were starting to turn around in my small business. By July people were waiting and expecting Congress and the President to take real steps to address our runaway spending and huge national debt. By August people were disgusted that the idiots in Washington hadn't done anything to solve the problem.
People in the US have lost all faith in their representatives to do what is right for the country. We do not need them to provide everything for us but it would be nice if they stopped screwing things up.
We need a leader to step up and make hard decisions. Problem is only political hacks seem to run for office.
I saw somewhere online today that Democrats have decided that we should only try and cut 1 trillion in spending over the next 10 years. Are they kidding? At our current rate of spending and debt service obligations we will owe another trillion by Christmas. The level of incompetence in Washington is criminal and we should get rid of all of them. At least we could save on their expensive private health insurance and salaries.
Economy spiraling out of control, and Congress takes a month off... Priorities?
We have lost the house, there is no more savings, unemployment is running out and the only thing left is debt. I guess we dont care about the Dow or the price of gold -- we care about finding a job at some sort of salary close to what we had--how much is gas and food.
"definition of depression includes two general rules: (1) a decline in real GDP exceeding 10%, or (2) a recession lasting 2 or more years"
Let's see it's been 4 years, national debt has more than doubled since 2004, and the GDP decreased by more than 10% in 2009 alone. Maybe it's a new recession...or maybe all of you talking heads have no clue what the F you're talking about. When will people stop believing the BS this government shovel into your mouths and stand up against this crap. The revolution that created this country was over less.
Sad to say but I'm afraid that it would probably take another Industrial Revolution to pull us out of this one. What was once the police to the world is now becoming the laughing stock to the world. Wake up America we are all responsible for what is going on now. If we dont individually pull our weight this country is going to fall apart and our children won't have a flag to wave on the 4th of July. Let's not let our forefathers down!!!!
Give me a break!
The recession has never ended. It is just the continuation with a bigger dose of reality.
Our country finances can be compared with finances of our homes. We try to balance our personal budget if we can not save some money in any month. So why our leaders think that they can go in debt and still be happy?
I fault all the politicians who have created this mess.
On top of that I see our leaders are happy to give free money to many countries including those countries who will like to kill us any moment they get opportunity. The audacity of thinking is that those moron leaders are helping others at the cost of our American people who need the help.
I understand that there are many countries where help is needed, but the charity must begin at home first.
We are in serious debt and we need to cut waste of expense ASAP.
We must balance budget like we are trying to balance our personal budget, and reduce wasteful expenditures immediately.
All politicians need to cut wasteful expense from their perks, and then they should seriously look for all the wasteful expense that we all can live without.
Regarding taxes we all are citizens of the same country so we all should share the tax load.
If any group including millionaires are getting by not paying taxes, then that is not correct either.
Finally All politicians need to give priority to the country instead of giving priority to the party they are affiliated to.
When did the last recession end?
Was it when unemployment went from 8% to 8.5% or even 9%?
Was it when homeforeclosures went from 1.5 Million to 2 Million or even 3 Million?
How about when job losses went from 300K a month to 400K each month?
Folks we NEVER ended the previous recession, this is just one level closer to DEPRESSION!
"CHANGE YOU CAN BELIEVE IN"..........
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