Over the last few weeks, some of the most respected voices on Wall Street have been warning that the US economy is headed for tough times – very tough.
There always are alarmists and “Gloomy Guses” out there. But these are the opinions of the best-known movers and shakers on Wall Street – individuals who are mainstream, powerful and respected. The fact that individuals of such stature have such views should give prudent investors pause.
What if they’re right? What if an event of the magnitude of an economic hurricane comes our way? How steep would the decline on Wall Street be? What would the economy look like when it finally ends?
Lessons From The Past
One way of preparing for any eventuality is by learning lessons from events of the past, and in this case that would be the Great Recession of 2008.
If you’re very young and didn’t suffer through that financial nightmare, consider yourself lucky, because it was one of the worst economic crises in US history.
The International Monetary Fund called it “the most severe economic and financial meltdown since the Great Depression,” and for good reason. The housing market collapsed, some legendary Wall Street institutions folded, and stocks swooned; for a time, it seemed there would be no bottom to the decline.
The outlook was so bleak that Jim Rogers, an exceptionally skilled money manager and trader, hurriedly sold his mansion in New York, gathered his family and moved to Singapore because he anticipated that the entire financial system would collapse.
Fortunately it didn’t, and selected investments actually did well. A huge majority, however, did not. The following, which comes from data reported by Investopedia, makes this very clear.
Return Between Oct. 2007 - Feb. 2009
Gold + 18%
10-year treasuries + 11%
Commodities - 40%
S&P 500 (large caps) - 53%
Russell 2000 (small caps) - 53%
Only 25 stocks in the S&P 500 had positive returns during 2008. “The stock that beat all others in the S&P 500 during 2008 was discount store Dollar General, rising more than 60% that year,” says Investopedia. “This was nearly double the second highest-returning stock.”
During the Great Recession, shoppers searched discount stores for all kinds of bargains, but some hard-pressed consumers focused their efforts on finding essential items.
For example, some well-stocked 99-cent stores sold frozen meat at amazingly low prices; they also stocked soda and related drinks. The catch was that these items were of poor quality, unknown brands, and sitting on shelves for a long time; the meat usually just a few days away from the expiration date.
Still, for unfortunate individuals who couldn’t afford to purchase higher quality items, they were a great bargain and an important one, as they were still a protein meal and eating it meant another day of not going hungry.
Multiply this scene thousands of times each day at stores across the country, and even though the profit margins were very low, they still added up. Wall Street caught on and shares of discount stores soared.
More Than One
Discount stores was the only industry appearing twice on this list – understandable, since growing numbers of consumers were desperate for bargains. Even in tough economic times, consumers must have essential items, and buying off-brand products is more palatable than having to do without. The other discount store was Walmart, which finished in sixth place.
Dollar General and Walmart are also major grocers, and several other companies that make or sell inexpensive food also turned up on the list; they are General Mills, Kroger, McDonald’s, and Darden Restaurants.
Health care is also essential, and three companies in or related to this made it to Investopedia’s Top 10: they are Vertex Pharmaceuticals, Amgen, and Edwards Lifesciences.
A few other industries also held up during the Great Recession, such as freight haulers and companies that make products for them, such as Old Dominion Freight, Westinghouse Air Brake, and C.H. Robinson Worldwide; all had positive returns in 2008.
During tough economic times, many consumers can’t purchase new products such as cars and subsequently repair the one(s) they have. Similarly, they also make home improvements themselves and do their own gardening. This is why do-it-yourself businesses like AutoZone, Tractor Supply, and Sherwin-Williams also did well.
Repeating The Past?
In the event of another financial crisis, will the winners of the past shine again? Probably some will, but not all of them, because recessions are unique and each has its own fingerprint. Also, companies with a strong cash position and low debt will weather any storm better than those in a weak financial position.
There are other points to keep in mind. For example, unlike recessions in the past, in this one, interest rates are rising despite the weakening economy, inflation is at a 40-year high, the virus remains a challenge, and US household debt just topped $16.2 trillion. And with more than $30 trillion in debt, the government’s options in slashing taxes and starting new stimulus programs are clearly more limited than they have been in the past. Credit card debt too, which topped $1 trillion at the beginning of the year, is rising very sharply as many consumers are forced to use them to shop.
“It may be prudent to stick to stocks that have low debt-to-equity ratios and avoid biotech start-ups that are still in their early phases of development,” suggests Investopedia. Of course, this is general investment strategy and not geared to specific ideas.
There have always been risks in investing, and that’s especially true if some horrible economic problems emerge. As they say, “safety first.”
Sources: bloomberg.com; businessinsider.com; cnbc.com; debt.org; federalreservehistory.org; investopedia.com; lehnerinvestments.com