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Do Recession Fears Mean Sell Growth Stocks?

FYI | Apr 03 2019

By Peter Switzer, Switzer Super Report

Should recession fears prompt you to dump growth stocks?

Over the past few months I’ve been trolled on Twitter by those ‘bush economists’ who think we face a house price Armageddon. It culminated in a debate on my Money Talks TV programme between a doomsday merchant, John Adams (a former economic adviser to Libs Senator Arthur Sinodinos) and AFR columnist and Coolabah Capital Investments, Chris Joye.

Reacting to some of the comments on Twitter, one genius said the debate suffered from dodgy data. I replied that most data has a dodgy aspect and when it comes to economics, it’s really just a guessing game. However I always like to get my guessing help from the smartest people I can recruit.

In my lifetime, I’ve had help from smart people and dumb people — the smart ones usually work out best!

My function each week here in my Monday column is to think out loud on subjects I think you should be pondering. I always say when it comes to wealth-building, business-growing and any kind of high level endeavour or self-improvement, it’s great to have an objective set of eyes.

And it’s great when those eyes are owned by really smart people.

Last week I suggested not getting too spooked about an inverted yield curve and the likelihood of a recession.

Over the weekend, Shane Oliver from AMP Capital gave us 5 reasons “not to be too concerned by the latest plunge in bond yields and a negative yield curve.”

Here they are:

  1. While a negative yield curve has preceded past US recessions (the lag averages around 15 months), there have been numerous false signals and following yield curve inversions in 1989, 1998 and 2006, shares actually rallied.
  2. Other indicators are not pointing to imminent global recession. In particular, we have not seen the sort of excess – overinvestment, rapid debt growth, inflation, tight monetary policy – that normally precedes recession.
  3. Bond yields lag shares, with the bond market catching up to last year’s growth scare that depressed share markets. Following the February 2016 low in shares, bond yields didn’t bottom until July/August 2016.
  4. The retreat from monetary tightening has been a factor behind the rally in bonds but this is actually positive for growth.
  5. Part of the reason for the rally reflects investors unwinding expectations that central banks would continue pushing towards tightening. What the decline in bond yields reminds us though is that the constrained growth and low inflation malaise seen since the GFC remains alive and well. The latest plunge in bond yields will keep the “search for yield” going for longer, which is positive for yield sensitive investments like commercial property and infrastructure.

The big watch for me to pass on to you is about the run of economic data, the effects of a signed Trump trade deal, stimulus in China, the EU and elsewhere, as well as efforts by central banks worldwide to keep interest rates helpful for economic growth.

Locally, we are set to see the Government embark on an RBA-supported bout of tax cuts, which might mean it won’t cut rates this year. But remember, Shane Oliver, Westpac’s Bill Evans and NAB’s Alan Oster, to name three, all expect two rate cuts this year!

This is Oliver’s take on what he expects to see unfold globally for the economic and market outlooks.

“If the momentum of global data – particularly global business conditions PMIs (Purchasing Managers Indexes) – doesn’t soon start to stabilise and improve as we expect, then the decline in bond yields will start to become a deeper concern. Either way share markets remain vulnerable to a short term pull back.”

The take-aways from Shane are:

  1. Expect economic conditions to improve.
  2. A short-term sell off should not surprise.

And in concluding on stocks, this is what he came up with: “Share markets – globally and in Australia – have run hard and fast from their December lows and are vulnerable to a short-term pullback. But valuations are okay, global growth is expected to improve into the second half of the year, monetary and fiscal policy has become more supportive of markets and the trade war threat is receding, all of which should support decent gains for share markets through 2019 as a whole.”

So should you become more defensive and start stocking up on recession-proof stocks that fall but not fall dramatically in a GFC-style event and, along the way, keep paying OK dividends?

Coles and Woolworths fit the bill here and so do the banks, with their dividends but their share price can be overreactive to stock market worries because so many people hold their stocks.

During the GFC, Woolworths (WOW) lost about 30% when the market was down 50%. But Wesfarmers, which wasn’t just Coles but was also in mining and other activities and carried a lot of debt, dropped over 60%. Clearly, if you are high growth-oriented in your portfolio and not susceptible to capital gains tax, pocketing profit and becoming more defensive over 2019 and into 2020 might be a sensible play.

I’d expect a leg up for stocks first when the trade deal gets signed between the US and China. Then a sell off makes sense before the stimulus packages and Donald work to pump up the States before the end of year election in 2020 kicks in to help stocks rise. But could the upside be limited?

My gut-feeling says the market won’t go much higher from here but this info here makes me wonder whether I’m getting too cautious too early. Note the following:

  1. The current U.S. bull market is 10 years old and is up 282%.
  2. The average bull markets goes for 9 years but is up 480%.
  3. The 1980s bull market went for 12.8 years and was up 845%!
  4. The 1990s bull market went for 12.9 years and was up 816%!
  5. The longest was in the 1950s and went for 15.1 years and was up 935%!!!

It’s your decision but I’m staying pro-growth. I will gradually become defensive and more heavily inclined to dividend-payers, which often lose less market cap in a bear market. Why? Because investors go looking for income when stock prices are letting them down.

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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