Home' Trinidad and Tobago Guardian : February 18th 2016 Contents BG22 INTERNATIONAL
BUSINESS GUARDIAN www.guardian.co.tt FEBRUARY 18 • 2016
1. How bad are recessions for stocks usually?
Bad, but not as bad as the last one.
A drop of more than 20 per cent should be expected,
and most recessions have seen the S&P 500 fall at least
that much. Including the 19.9 per cent drop around the
1990-91 recession, it s happened in ten of the last 14.
The last recession was far more painful for investors,
with its 57 per cent plunge.
But that occurred when investors were questioning
whether the financial system would even continue to
exist, and it was far from typical. You have to go back
to the Great Depression to find a bigger drop for stocks.
2. Which stocks tend to do worst?
Size matters. The smaller the company, the more its
stock tends to fall during a recession. The Russell 2000
index of small-cap stocks has done worse than the S&P
500 index of large-cap stocks in each of the past five
recessions. A similar scenario is playing out now. The
Russell 2000 has lost 26 per cent since peaking in June,
nearly double the S&P 500 s drop.
3. Which stocks tend to hold up best?
Even when the economy s shrinking, people still buy
food and diapers.
Because profits tend to stay steadier for companies that
sell everyday items to consumers, so do their stock prices.
That s why investors lump them with health care and
telecom stocks into a category known as "defensive"
They still fall during recessions, but not as much as
the rest of the market. Procter & Gamble and other makers
of consumer staples fell 31 per cent around the Great
Recession, roughly half the broad market s loss.
4. What about other "safer" investments?
Bonds are a traditional comfort blanket for investors
during downturns because they are less volatile than
stocks, and they generate regular income for investors.
During the last recession, bonds helped to limit losses
for investors with balanced portfolios, and then helped
them get back to even long before stock-only investors
did. The average intermediate-term bond mutual fund
has returned 1.3 per cent this year, through last Wednes-
Another traditional landing spot for jittery investors,
gold, has also climbed this year.
5. Why might the playbook
not work as well this time?
Investors scarred by the Great Recession have piled
into relatively safe stocks in recent years, even while the
economy was growing, in search of steadier returns. All
that demand means they re trading at higher prices relative
to their earnings, and more expensive valuations mean
these stocks may not offer as much protection as in past
As for bonds, their low yields mean they re not producing
as much income. That in turn means they can t possibly
provide as strong a cushion as in past recessions.
Gold, meanwhile, is up this year but has been on a
general downward trend since the summer of 2011. Gold
tends to do best when worries about inflation are spiking.
Many central banks around the world now see the oppo-
site---a sustained cycle of falling prices, or deflation---as
the bigger threat.
6. Why not sell stocks and just get out of the way?
It s scary to watch the stock market plummet, but long-
term investors have always eventually been made whole.
Someone with terrible timing who bought an S&P 500
index fund on October 9, 2007, when stocks peaked before
the financial crisis, got back to even by August 2012, aided
by dividends. That meant a wait of about five years.
Plus, much of stocks long-term returns can come from
just a handful of really big days, and it s impossible to
predict when they ll occur. Miss them, and owning stocks
gets much less lucrative. Two thirds of the S&P 500 s
gain over the last decade has come from just five days.
Wall Street is hurting, and Main Street
doesn t care. It s got burgers and cars to
Big losses in stock markets around the
world this year have the wingtip-set fret-
ting, but regular consumers across the
United States are confident enough to open
their wallets and spend more. It s an about-
face from the early years of the economic
recovery, which began in 2009, when stocks
and big banks were soaring but many on
Main Street felt like they were getting left
"It s almost like a stock market is a dif-
ferent animal," says Earl Stewart, who owns
a Toyota dealership in North Palm Beach,
Florida, far from the roiling markets in
New York, Frankfurt and Shanghai. "We re
not seeing any of the negativity."
The stock market s malaise hasn t affect-
ed his customers, at least not yet. Sales for
the past year have been the best since 2007,
and he had record profits in 2015.
The divergence underway between Main
Street and Wall Street highlights the dif-
ference between the US stock market and
the economy. The stock market s worries
are centered on things like the strength of
foreign economies, such as how much
China s sharp slowdown will hurt exporters
and businesses in other countries. Low oil
prices are crushing the shares of big energy
companies and the big banks that lend to
them but leaving consumers with more
money to spend after they fill up their car
with cheap gasoline.
These forces have dragged the Standard
& Poor s 500 index down 12.5 per cent
from its peak in May. Foreign stocks have
lost double that. Hedge funds, which cater
to the wealthiest and biggest investors, are
also struggling. They lost money in January
and got off to their worst start of a year
since 2008, according to Hedge Fund
Economists say the split trends between
Main Street and Wall Street can continue,
but only up to a point. If profits fall sharply
enough, for example, it could push CEOs
to once again cut swaths of jobs in order
to shore up their earnings. If stock prices
fall deep enough, the panic in the headlines
could traumatise consumers and spending
For now, though, Main Street continues
to trend upward. Only 13 per cent of the
US economy depends on exports, and the
rest of it---which is mostly consumer spend-
ing---is still growing, albeit slowly.
"Down here, as a small business owner,
you don t feel connected to Wall Street at
all," says Jon Sears, a co-owner of four bars
and restaurants in Columbia, South Car-
olina. "When I talk to people in Columbia,
I can t think of a conversation I ve had
about the stock market in the past two or
His business depends instead on the
nearby University of South Carolina. Rev-
enue growth at his locations has held up
this year, at his cheapest bar and his more
upscale restaurant that serves local, organic
Retailers around the country are seeing
something similar. Shoppers bought more
autos, clothes and other items last month,
even though the S&P 500 in that span had
its worst week in more than four years. US
retail sales rose 0.2 per cent during the
month, beating analyst expectations.
Consumer sentiment did show a dip in
early February. But confidence still remains
near its average for last year and well above
where it was for every other year of the
recent bull market.
Among the reasons that Main Street is
feeling relatively confident while Wall Street
The job market is getting better.
Employers continue to add jobs, partic-
ularly in the retail and healthcare industries,
and the unemployment rate is at an eight-
year low. Job growth did slow last month,
but economists say that just balances out
the big surge in hiring at the end of last
year, and they re still forecasting more
Even more importantly, wages are trend-
ing higher. That means workers are feeling
more secure in their jobs and in their
finances. Just over three million workers
quit their jobs in December, the highest
number in nearly a decade. That s an opti-
mistic sign because people generally quit
when they have a higher-paying job offer
Bills are getting a bit easier to pay.
The plunging prices of gasoline, natural
gas, heating oil and other commodities are
getting lots of attention, but prices are low
across the economy. Prices for meat, poul-
try, fish and eggs also fell in December
from a year earlier. So did prices for clothes
There is a fear that the economy may
get too much of a good thing. If prices fall
too sharply, it could lead to a vicious cycle
in which customers wait longer to make
purchases, which forces businesses to cut
Home values are rising.
"More people care still care about the
value of their homes than the value of their
stocks," says Diane Swonk, an independent
That s because for many Americans, their
home is their biggest if not only investment.
And that investment is doing well, regard-
less of the stock market s struggles. Home
prices nationwide are nearly back to peak
levels from before the Great Recession, and
they re already at a record in San Francisco
and several other cities.
It may just be Main Street s time in the
sun, says Bob Doll, chief equity strategist
at Nuveen Asset Management. He says
economic recoveries have long been split
into two phases.
"The first half of an economic cycle is
when markets tend to best, and that s when
Wall Street gains on Main Street," Doll says.
"The second half is when labour gets an
increasing share of GDP, and that s just
STAN CHOE, AP Business Writer
Main Street holds up as Wall
Street struggles, for a change
What a recession
does to your money
Links Archive February 17th 2016 February 19th 2016 Navigation Previous Page Next Page