I’m not forecasting a recession, but . . .
My previous blog post about investments for a recession has proved to be very popular. But I recently looked at Capital Spectator’s chart showing returns by industry year to date:
The market is anticipating a domestic slowdown or recession, but not an international recession. What’s the difference? It’s quite possible for the United States to go into recession with the rest of the world continuing on. Oh, you’ll see newspaper articles saying that China’s exports will drop if the U.S. goes into recession, but such "echo" downturns are far, far muted. An American recession would most likely be limited to North America.
The chart shows investors shunning financials and consumer discretionary stocks, which would be hurt by a domestic recession. But energies, materials, and industrials have done well. They would normally be very recession sensitive. What’s the deal?
In a globalized world, those sectors–energy, materials and industrials–trade off of international conditions, not domestic conditions. So if you are pessimistic about the global economy, those sectors should be dumped as well as the financials and consumer cyclicals that have already been dumped.
What about me? I personally don’t think we’re headed for a recession. But if you do, figure out whether you expect a domestic recession or a global recession, and act accordingly.