The problem: how do we recognize when a recession is happening? You’re in it, but the government does not recognize the fact until dated government figures are released. A recession is defined as two consecutive quarters of declining Gross Domestic Product (GDP).
The U.S. economy grew at a strong 4.9% in the third quarter of 2007, followed by GDP growth of only 0.6% in the fourth quarter, and possible negative GDP growth in the first quarter of 2008. Hence, the government will recognize the U.S. economy as being in a recession at the end of this May. On May 29, to be exact, the official first-quarter GDP numbers will be confirmed by the U.S. Commerce Department.
In a PROFIT CONFIDENTIAL column I wrote on May 14, 2007, entitled, “Can a Recession Really Be Far Away?” I predicted that we would be in a recession by the first quarter of 2008. We are there now. (Late comers like Warren Buffett are only now admitting that we are in a recession.)
But what does a recession really mean for investors and their portfolios? It means a lot of things.
General Motors has reported a 13% decline in February sales. GM stock is near a 10-year low. Is it a bargain? Will it become more of a bargain? My opinion is that yes, GM stock will become more of a bargain. I would not be surprised to see GM stock to eventually trade at its 1974 low near $10.00. And that will be what I call an opportunity.
Construction spending in the U.S. took its biggest plunge in 14 years in January. Does that make construction and homebuilder stocks a bargain? Not quite yet, in my opinion. I see the big homebuilder stocks bouncing up a bit, but I need more confirmation that the worst for housing is behind us before I would buy the builder stocks.
A key indicator, the Institute for Supply Management factory index, dropped to 48.3% in February. A reading below 50 can be interpreted as economic contraction. And the stock market, with all this negative news, is not really taking it on the chin yet. Does the stock market know something we don’t?
Yes, February was the fourth month in a row that stocks fell. We haven’t seen such a losing streak since 2002. But considering the bad news everywhere you look, I would expect the stock market to be taking the “hit” harder. Maybe the market sees more oomph in the Fed interest-rate cuts than the economists.
Would I jump in and buy stocks? No. I continue to see gold stocks as the only group offering value today. But the actions of the stock market over the next few weeks will be very indicative of where we will go for the remainder of 2008. I’ll keep you posted.