When there are predictions of an impending recession, they typically range from “worse than 2008” down to “a lesser event.” Nobody ever says there will not be a recession. The only two points of discussion are “when” and “how bad.”
With these cheerful thoughts in mind, it might be worthwhile to think about planning for what many consider an eventuality of the marketplace.
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Among the most frequently mentioned “signs” a recession is on the horizon are the situation in Europe – that situation being economic instability, QE and a potential Brexit from the European Union.
Then there’s the economy of China, which many fear has already begun to pop. An interesting comparison between the mountain of student loan debt and the mortgage loan debt of 2008 has been made by some.
There’s also a great deal of debate about just how good (or bad) the unemployment picture is. Many economists point to the number of people who have stopped looking for work along with those who are underemployed as uncounted members of the legions of the unemployed.
Finally, central banks have very little wiggle room when it comes to interest rates and economic data suggests similar patterns to those shown just before the last recession.
An Invisible Bubble
As if visible signs weren’t enough, some suggest there exists an invisible bubble created by excess reserves in the banking system. This abundance of liquidity, the theory goes, distorts the natural pricing mechanism of a free market.
That money by some accounts has flooded into various financial assets, artificially raising prices to levels above where they would be under normal circumstances. Those who champion this scenario have no idea when that bubble will burst – merely that it will.
What To Do
Whatever the cause, and whenever the time, eventually a recession will come. Real estate investor Sam Zell says it could be as soon as 2017. Others predict yet this year.
When it comes to stocks, some sectors are more vulnerable than others. Those sectors are the ones investors should examine for some possible selling ahead of a recession.
As an investor you need to decide how, when and what to sell. These three sectors – and highlighted stocks – may provide food for additional thought.
In a recession, airlines in general will feel pain. With lower oil prices already factored into stock prices, there’s not much else available to help maintain prices.
Among the more expensive airlines, Southwest Airlines Co. (NYSE:LUVB) could be vulnerable, according to some experts. The stock trades at nearly 13 times earnings. It’s worth noting, however, that Woo Trader rates LUV Outperform, Zacks has a “Buy” rating and TipRanks rates the stock “Strong Buy.”
The last recession saw housing take a tumble for obvious reasons. This time around, the same could be true. Millennials have not fully committed to home buying and in a recession would be likely to continue their rental patterns.
One of the most expensive homebuilders is M.D.C. Holdings Inc. (NYSE:MDCC) which trades at 18 times earnings. Add to that the fact this builder focuses on speculative homes and the red flags should be flying high. Woo Trader currently rates the stock “Perform” and both Zacks and TipRanks have a “Hold” rating on MDC.
Consumer discretionary spending scales back during a recession. While transportation is essential, a new car is not. Since a car is a large purchase, this is one area of discretionary spending the would be expected to take a hit.
According to experts, the car stock to avoid in a recession would be Tesla Motors Inc. (NASDAQ:TSLAC). Tesla reports earnings after the bell today (Wed.). The company is expected to report adjusted EPS of -$0.60 versus adjusted EPS of -$0.36 a year ago. Hopes for a turnaround hinge on sales of the company’s mass-market $30,000 sedan, something that may not materialize in a recession environment.
Currently Woo Trade has a “Perform” rating on the stock with both Zacks and TipRanks rating the stock “Hold.”