Recessions are a funny thing. Nobody knows they're happening when they start. When they end, it's not officially declared for months. Federal Reserve Chairman Ben Bernanke finally agreed last week that a recession is "possible," and another month of falling employment seemed to support his fears.
Stock markets have some stronger opinions on the matter, and what they're saying may be important for your portfolio. Depending on where we are in the current cycle, it may be time to think about buying today. Since markets are always looking ahead, stocks usually start their declines before downturns appear and recover shortly after economic activity hits bottom.
Some analysts say it's time to revisit opportunities that looked solid before the financial, housing, and credit woes sank stocks at the start of the year. Others aren't ready to commit. Here are two different strategies for investing now.
Don't look back
John Canally, an investment strategist for LPL Financial, argues that it's the right time to watch closely for good buys now because of historically strong gains at the tail end of a recession, plus the possibility of an election-year rally. "On average you miss a 25 percent uptick by waiting for the end of a recession," he says. "There's definitely a penalty for looking in the rearview mirror. You can't wait until home prices bottom, the recession ends, and the Fed chairman sounds the all clear."
The early-'80s recession lasted from July 1981 until December 1982. Canally says stocks bottomed in August of that year, and from August through December the S&P 500 climbed 35 percent. The same thing happened in the 1990-91 recession when markets bottomed in October 1990, about six months before the recession ended the following March. Stocks returned 28 percent during that period.
This time around, markets hit some of their lowest levels during January, and if the recession is a shallow one, investors could be closing in on a similar midpoint as spring turns to summer. Canally advises investors to go back on the offensive, picking growth companies over value and shares in U.S. firms over foreign shares. New leadership could emerge in large-cap names in growth sectors like healthcare, industrials, and technology, he says.
Stocks could also end the year with a bang, rallying heavily through the fourth quarterthanks to the ongoing boost to growth from Fed interest rate cuts, the tax stimulus rebates, and the November presidential election. "There's only one time in an election year since 1960 when stocks sold off in the fourth quarter," Canally says. "That was during 2000 because markets were sniffing out the 2001 recession."
A late-year surge will leave the S&P 500 up 10 to 16 percent for 2008, he predicts.
Richard Cripps, chief market strategist for Stifel Nicolaus, sees some upside, too, thanks in part to a huge amount of cash waiting to be deployed. He notes that money market assets as a percentage of the total market capitalization of the Wilshire 5000 stock index is 26.2 percent, the highest level since two other notable months—October 2002 and July 1982—when bear markets hit lows during recessions. That doesn't mean near-term markets won't be volatile, he says, but the bull markets that followed that money's return to the market in the past make equities attractive today.
"If you're a retail investor and looking out and saying I'm in this for longer than a year, the risks and rewards pretty much favor stocks," he says.
Others are more cautious. Chris Orndorff, a portfolio manager at Payden & Rygel in Los Angeles, says stability is still the way to go for investors, given market volatility. He recommends sticking to the recession playbook: large-cap stocks, safe earnings, and international exposure. "There are always ways to make money, even in a recession," he says. "In a down market, investors tend to place a premium on stocks with more stable earnings prospects. Companies without stable earnings, like a biotech or semiconductor company, tend not to be places where you want to be."