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January 16, 2008
As Bad Times Arise, All Stocks Could Fall
While the barrage of selling in the equity markets to begin 2008 has definitely set the stage for a relief rally, hopes of sustainable economic and market rebound in the U.S. are growing bleaker by the day. This is the case not only because the major economic statistics have only just started to suggest that the U.S. housing recession is spreading, but also because no collection of stocks is likely to withstand the ugliness that lurks around the corner. Quite frankly, while it may have been a stretch to conclude that the carnage in housing related and financial companies would be contained last year, it takes a giant leap to contend that cyclical/energy/commodity stocks will be able to support the markets in 2008. In short, indications are that the earnings recession that started in 3Q07 is about to spread, and in dramatic fashion.
With healthcare and utilities the top performing sectors in 2008, it is clear that investors are already moving into traditional ‘defensive’ stocks. What is entirely less clear is where capital will rotate if, and more likely when, downward earnings revisions arrive in energy, technology, and commodity backed companies. Rather than speculate on potential rotational forces, it is safe to say that the coming bear market is likely to be a lot different than that of 2000. To be sure, in 2000 the investor could have easily combated the bear by positioning themselves in high yielding sin stocks, in your basic (non energy trading) utility stock, or even in REITs. Today no such havens exist as most quality sin stocks sport unattractive dividend yields and utilities are already the defensive flavor of choice. As for REITs, they remain one area worthy of investigation, although a real recession* would likely not see a repeat of the performance the group put in during the last recession.
* A real recession in my mind is a recession where housing prices do not skyrocket and the U.S. consumer does not keep spending more money and recklessly acquiring more debt. Such a recession has not happened in America in more than 17-years…
It may seem overly pessimistic to argue that most stock sectors will do poorly in 2008. However, remember that it was so overly optimistic to forecast an unprecedented global equities and real estate boom from 2003-2007 that no one did…
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