US will join Europe in recession
Look to healthcare blue chips and consumer staples for value
What is unique and troubling about this economic and stockmarket cycle is that the US appears to be on its way to joining Europe in recession in spite of monetary policy being at its most accommodative.
Normally, it’s the Federal Reserve and restrictive monetary policy that slow the economy down. Given this unique situation, we continue to move the fund towards less economically sensitive, mega-sized stocks. In spite of the economic backdrop, we view large US multinationals as one of the best opportunities among investment choices.
In spite of the continuing bleak employment figures in the US since the onset of the recession in 2007, economic expansion as measured by the ISM index, a national purchasing manager survey, has experienced one of the longest periods of economic growth in the post-war period – 34 months. This said, the recent index reading of 49.7 for June – anything less than 50 indicates economic contraction – portends a possible recession on the horizon.
Looking back, the conditions that prevailed as the stockmarket rallied to new highs in January 2007 were a warning shot about the imminent recession to follow.
The rally was based on confidence in a ‘goldilocks’ economy in the US, a term describing conditions that are neither too hot nor too cold. At roughly the same time, however, the ISM index pierced below 50 for the first time since July 2003, a few months after the bull market had begun. At other times when the ISM index fell below 50 after an expansion, such as August 2000, June 1998, May 1989 and August 1979, it foretold of further economic contraction, consistent in most cases with outright recessions that followed.
We are likely to see growth rates continue to drop off until corporations as well as consumers regain confidence and start spending again. The major difference between prior points when the US economy began periods of economic contraction and today is that, outside of instigating a policy of high inflation through further quantitative easing, the Federal Reserve seems impotent in trying to combat the current contraction and massaging the business cycle. US rates are already at record lows across the yield spectrum.
Higher rates may be the necessary tonic to bring hopes of long-term recovery, but we see no chance in that happening. Housing construction, notably absent during the current economic expansion, seems stable, but not yet at a point of accelerating again in spite of the record low mortgage rates.
While there are no easy answers in this macroeconomic environment, recent economic figures portend the formal declaration of a recession in the US before the end of the year.
A bias to defensive industry sectors seems warranted, with an emphasis on leading blue-chip firms in the healthcare and consumer staples sectors. We see genuine value in many large stocks in these areas and anticipate investors to further embrace them as the US economy lurches toward recession.
James Abate is fund manager of the PSigma American fund