The latest economic numbers seem to confirm my view that this recession is going to be worse than the last great recession. The U.S. first-quarter gross domestic product report of -4.8% underscores the economic devastation of the Covid 19 virus. The contraction in GDP was the largest drop since late 2008. Keep in mind that shelter in place and social distancing was only started in March in North America.
The drop of -7.6% in personal consumption was double the rate during the worst point of the global financial crisis. Other areas of the economy that resemble the last recession is a decline of 8.6% in business fix capital spending. The U.S. unemployment claims hit 30 million in just six weeks and an estimated 9 to 14 million more claims were not made because of online claim application systems were crashing.
The great recession of 2008-09, taught me that interest rates are likely to stay lower for longer. The Federal Reserve didn’t raise interest rates until Dec 2015 keeping zero interest rates for 7 years. The current yield of 10 year U.S. Treasuries has fallen to half a percent, a level not seen during the last recession.
Pension plans and retired seniors require monthly income however current yields on treasuries, gov’t and corporate bonds are not going to be enough to meet their needs. It may take another decade before interest rates get back to a more normal level. I believe that investors will have no choice but to switch from bonds and buy dividend paying stocks.
Unfortunately, many companies are preparing for a long and deep recession by cutting their dividends or temporary eliminating them all together. For example, Royal Dutch Shell cut its dividend for the first time since World War II by 66%, General Motors suspended their dividend and share buybacks. I have found many companies in a variety of industries that have also cut or suspended their dividends.
Mutual funds and ETFs (exchange traded funds) that specialize in investing in dividend stocks will have to adjust their holdings as more companies could join the dividend cutting or suspension club.
Why has the month of April seen the best stock market returns in decades.
- Some money managers are betting that the economy will rebound in third quarter of this year.
- Pension funds are rebalancing their portfolios by reducing their bond holding and buying stocks.
- The earlier than expected reopening of the economy is making investors more confident to buy stocks.
- Preliminary results that the drug Remdesivir reduces the recovery time for patients with the coronavirus and a hopeful development of a vaccine increased investors enthusiasm for stocks.
In my opinion, this looks like a sucker rally. The average recession lasts for about 11 months and the great recession that started in 2008 lasted for 18 months. Plus, medical experts predict that a second wave of this virus will hit in the fall. Japan and Hong Kong have already seen a small second wave of the virus after reopening parts of their economies. I am in no rush to jump into this uncertain market.
Looking back at the last recession, there are two sectors that I would avoid: energy (XLE) and financials (XLF), both underperformed the overall S&P 500 illustrated by the chart below which shows the performance of these two sectors from Jan 2008 until May 2020.
Two sectors that outperformed the S&P 500 during the same period were technology (XLK) and healthcare (XLV) illustrated in the chart below. Please note however, Amazon is not considered a tech stock but is included in consumer discretionary (XLY).
Stock pickers may have an edge during this recession. Over the past 10 years, the technology sector has outperformed the overall market thanks to the FAANG stocks. Individual investors who over weighted their portfolios with Facebook, Apple, Amazon, Netflix and Google had higher returns than most index and exchange traded funds.
I use a combination of owning some individual stocks and sector ETFs in my portfolio. Here are some telecommunication and pharmaceuticals stocks that are on my watch list which offer some safety and high dividend yields.
- AT&T (Ticker: T) yields 6.9%,
- Bell Canada (Ticker: BCE) yields 6%
- Orange (Ticker: ORAN) yields 6.5%
- Glaxosmithkline (GSK) yields 6%
- AbbVie (ABBV) yields 5.6%.
Common sense tells me that consumers will not be traveling, going to sporting events, movie theaters, theme parks, restaurants or concerts anytime soon. Many business can’t make a profit with current social distancing guidelines. It means that airlines will have to increase prices, many of your favorite restaurants will disappear and shopping online with curbside pick up will be the norm.
Warren Buffett has said “Never bet against America” and yet he is holding on to mountains of cash waiting to buy. Sound advice during these turbulent markets.