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What if we are about to embark on a new bear market?
How would your portfolio survive?
Are there any chances to thrive?
The odds of a recession taking root in the United States are growing. And with it would come a new bear market for stocks. In this article I will talk about how those odds stack up along with the best strategies to not just survive, but thrive during those trying times.
Recession vs. Soft Patch
As you probably know I have been in the Muddle Through economy camp for the last few years. That is a belief that the economy will grow below trend as we work off the excesses created by the Great Recession (and Fed/Government solutions to that problem).
The above scenario has held true for the last few years as most of the GDP readings have come in below the 2.7% historical trend for the US economy. There have been a couple periods over that stretch where activity dipped towards 0%, making us fearful that a new recession may be on the way. Each proved to be nothing more than a soft patch that was followed by an improving economic picture and rising stock market.
Yes, now could be just like those other soft patch occasions followed by a resumption of good times for investors. However, when I roll out the list of negatives stacked up against us, those odds start to diminish.
European Recession is here...only going to get worse as austerity measures kick in. How much of that pain washes to our shores?
Slowing of Emerging Market Growth: China gets all the headlines. And clearly their growth trajectory is on the decline. Yet we also have to remember that other emerging markets like India and Brazil are showing even worse signs of slowing. A reduction in their appetite for imports most certainly hurts our many export-oriented companies.
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Fiscal Cliff: The US economy is around $14 trillion in total. And next year we are set to reduce federal government spending by around $100 billion. That is equal to 0.7% of GDP, which is a healthy chunk taken out of an already low growth reading. Add a potential tax increase on top and this equation only gets uglier.
Earnings Estimate Revisions: Yes, I am talking about the flavor of the house over here at Zacks. Right now it is the worst reading since the Great Recession with 2.5 companies seeing negative revisions to earnings estimates for every 1 getting a positive revision. And with more earnings announcements like Cummins talking about a worldwide slowdown, the worse this reading will be...and the worse it will be for stocks.
Presidential Election: Many business owners will hold back on company investments until they have a clearer read on who wins the November elections and what policies will be in place going forward. Even a small decline in business activity would have very negative ripple effects to the economy.
Each problem in isolation is not strong enough to knock the US economy off its growth axis. However, when you add all the problems together, the sum total may be enough to press us down to 0% growth (aka "Stall Speed").
And once that deceleration process starts, it can have a mind of its own that leads many to worry about the potential of a recession. So the negative sentiment caused by the events above may drive home the final nail in our recessionary coffin.
I am not in total agreement that this will be the case. Unfortunately the odds of this unwanted outcome is at about the 50% mark. And until the odds improve then many investors will assume the worst case scenario, which will likely mean a serious pullback in stocks.
What to Do Next?
If you have enjoyed great success swimming in these treacherous waters before, then continue forward with the strategies that worked for you.
If your track record is "less than stellar", then it's vitally important to get some timely advice. Not just about how to sell some riskier stocks to thwart heavy losses. But also where to look to generate profits at this time. We've done this very successfully in the past and look forward to helping with it going forward.
That is why I have pushed my team to open up all of our portfolio recommendation services for you to get all of our advice and recommendations when you need it most.
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Steve is the Executive VP in charge of Zacks.com and all of its subscription services. His personal mission is to help investors achieve life-changing investment success by harnessing the power of earnings estimate revisions. Over the years, he has developed a full array of services to help investors do just that. Discover all of these services now to find the ones that perfectly fit your investment style. Learn more about Zacks Ultimate Trader.