Displaying items by tag: recession

(San Francisco)

Tech stocks are going to hold up to the next recession in very different ways. Some will prove quite defensible, while others will be wounded badly. On the defensible side, analysts contend that Google, Facebook, Twitter, and Expedia should do well. The core tenet of this argument is that digital ad spend will likely remain robust, keeping their revenues from dropping off too much. However, smaller companies like Cardlytics, Revolve Group, and Quotient Technology seem as though they may be wounded badly. Netflix might be the biggest overall risk, however.

FINSUM: Netflix is the most interesting name to discuss here. So is that ~$12 per month for Netflix a discretionary spend that consumers will cut back on in a recession, or is it now a staple? The answer to that question will decide its performance in the next downturn.

(Washington)

President Trump threw out an idea for a tax cut this week, then immediately backtracked by calling it unnecessary. The idea, however, appears sound. Trump proposed a payroll tax cut that would primarily help middle and lower class workers (in addition to a capital gains tax cut via indexing to inflation). That would make a lot of sense right now, as it would increase the spending power of the masses, increasing consumption and inflation, and lowering un-utilized manufacturing capacity.

FINSUM: We really like this idea of a payroll tax cut because it would help reverse some of the adverse affects of the wealth inequality that has built up since the Crisis. The more capital is concentrated in a small pool the less of it gets spent (i.e. a single person can only spend so much), which slows the economy. If you increase the spending power of the majority of Americans a lot more will get spent, boosting the economy.

(New York)

We guarantee that we have a great recession signal in hand that you have not been paying attention to: RV sales. Yes, you read that right, RV (recreation vehicle) sales. Elkhart, Indiana is the epicenter of motorhome production, and their product has proven to be a reliable recession indicator. “The RV industry is better at calling recessions than economists are”, says one economics professor at Ball State University. The big worry is that shipments of RVs are down 20% this year, a big drop.

FINSUM: This seems like a classic consumer discretionary spending leading indicator. And it is not looking good right now.

(New York)

There are a handful of safe haven stock sectors that investors tend to rely on during market downturns. Healthcare, utilities, and REITs come to mind. Lately, some have been saying bank shares may also prove a good defense. However, investors should be very wary of two of those just mentioned: healthcare and banks. While on the surface healthcare stocks look very good for a recession—it is not as if people stop getting sick—the reality is that there has never been more regulatory pressure on the sector (from both sides of the aisle), which means it is far from safe. Additionally, the idea that banks have become safe, utility-like dividend machines is flawed, as bank earnings are very exposed to the economic cycle, and thus will likely see big moves in both price and yield.

FINSUM: We agree with this assessment entirely. Healthcare is more vulnerable than it has been in memory and banks are a long way from being dependable utilities (excellent PR job by Wall Street though!).

(New York)

Bloomberg has published a very insightful article about the current state of the market. In particular, it offers a view of how the big run up in bonds is likely to end. The fears that are driving the bond market—mostly that de-globalization will cause a recession—can only end two ways. Either the recession and de-globalization never materialize, in which case yields shoot back up, causing big losses in bonds. Or, the breakdown of global trade does happen, In this scenario, goods likely become significantly more expensive (especially in west) because there is no more labor and cost arbitrage. In this scenario, inflation then jumps, again sending yields much higher and sparking losses. In other words, the current bond market can only end in tears.

FINSUM: This was a very insightful argument in Bloomberg today. While there are some nuances that might cause some different outcomes, the basic contention is quite astute. Stocks seems a much better bet.