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Survival Strategies for Stocks During A Recession (Part 1)

3 October 2007 - Features - Editor

Since recession belongs so much to the domain of academic macro-economists, private investors are often in quandary about what to do with their portfolios of stocks. Should we sell and move monies in to gold? Perhaps there is something to be gained from studies of past recessions, and how they were caused (Dow, 1998). It is likely that future recessions of a global world are less cataclysmic than the Great Depression of the last century in the United States. All sectors are unlikely to behave in tandem, and it is probable that some blue-chip stocks will continue to do well though indices prepared in the past, may stand still, if not head south.

Uncertainty is integral to projection, and no one can live in the worlds of stocks and investments without considerable disquiet about what may lie ahead. The motives of professional investors and the media are suspect when they make gloomy forecasts, because they may merely be trying to win stocks we hold at distress prices! Such exploitation is unnecessary, because we can all think like professionals, and build portfolios of stocks which can stand us in good stead during bearish phases of business cycles.

Stocks as Weather Vanes of Recession

Failure to improve productivity, and disturbances in balances of supply and demand at any point of a business model, may be inferred, from expert reviews of past recessions, to predict down swings in relevant sections of an economy (Dow, 1998). Any company, which fails to match competitive cost trends for its products and services, is headed for trouble. Similarly, if the economic health of the customers of a business are affected adversely, or if strategic suppliers cannot match demand trends, then a company in which you hold stocks is likely to suffer. All stocks will yield the same conclusions when inquiries are made about their cost trends, customer well-being, and supplier linkages: however, each of these factors can be used to forecast reliably, how the values and yields of securities are likely to behave in the future. The results may not be very meaningful when good times abound, with bullish sentiment dominating the values of stocks. However, maintaining a conservative approach, at least for stocks held for the long term, will protect investors should a recession strike unexpectedly.

Finding Stocks Which Are Recession Resistant

Personal Consumption Expenditures (PCFs) are relatively easy to understand as economic indicators, because all investors in stocks are also consumers (Ellis, 2005). We can relate such data to our personal experiences without resorting to the expertise of others. This concept can be used to build a portfolio of stocks around things which we either buy directly, or the purchase of which is associated with our daily vocations. Anything which we would continue to buy even if our household or company budgets were under strain, points to a manufacturer or to a service provider that can thrive even in a recession. Since the exact unfolding of a recession is never known with certainty, all portfolios should build long term holdings around such stocks of ‘essentials’.

Survival Strategies for Stocks During A Recession (Part 2)

 


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