By JACK HOUGH
If your stocks are plunging, your income is stagnant, and your spouse just lost his or her job, economists have "good" news. According to their definition of prosperity, the current period may not qualify as a recession. Hosanna!
If that fails to satisfy, do what I do: Start declaring your own economic phases. For example, there's fakespansion, when growth is fueled entirely by debt, and Congrecession, when politicians are the biggest economic worry. Above all, review your stock holdings to make sure they have the attributes that predict outperformance in a weak economy. That way, an economic frownturn -- a long period of dribbling growth that fails to make investors smile -- needn't turn your retirement into a retirecan't.
The basic problem with measuring the economy is that not all growth is good. But any process of culling the good from the bad is too subjective, so we simply count the money we spend and call it gross domestic product. Changes in GDP alone define expansions and recessions. That produces some odd effects. War, disaster, disease and divorce are excellent for the economy because they spur spending on weapons, lumber, pills and lawyers. A mother's care is worthless because she isn't paid. And deficit spending by government is as worthy as cash purchases by businesses.
If the measure is misleading in the best of times, it's almost farcical now. Chief among the reasons we're officially in a recovery: House and car sales are so dismal that they're not expected to get much worse, and the government over the past four years has borrowed and spent more than $35,000 per household.
Recent research from Europe offers U.S. investors guidance on how to invest during an encore recession. The 17-nation euro zone is expected to fall into recession in coming quarters, and the U.S. will merely come close early next year, according to Goldman Sachs. Analysts at Bank of America Merrill Lynch recently recommended that European investors switch to a recessionary strategy. U.S. investors should pay attention too. Based on economic and stock market data going back to 1992, Bank of America has drawn conclusions about which stock traits pay off during different parts of a growth cycle. For example, fast earnings growth bodes well during booms.
In recessions, four characteristics point to outperformance. The first: low share price relative to measures of value like earnings, sales and dividends. The second: low risk, as evidenced by limited trading volatility in the past and tightly clustered earnings estimates today. The third: high quality, defined as an ability to earn healthy profits using limited assets and debt. The fourth: size -- when times get tough, big is better. Below, four U.S. firms that do well in these areas.
Ready for a Relapse?
These companies exhibit traits that suggest they will outperform during a downturn.
|Company (Ticker)||Industry||Share Price ($)||Market Value ($bil)||Price/ Earnings*||Price/
|Dividend Yield (%)||Return on Capital (%)|
|Dover (DOV)||Industrial machinery||47||8.8||11||1.1||2.7||11|
|Medtronic (MDT)||Medical equipment||32||33.9||9||2.1||3||13|
|Philip Morris International (PM)||Tobacco||63||110.3||13||1.5||4.9||39|
Based on forecast EPS for the current fiscal year.
Source: Thomson Reuters