(By Christy Heady) From belt-tightening to yield chasing, you can now add one more
juggernaut to your
how-to-manage-your-own-portfolio-to-do-list: Finding
companies to invest in that won't struggle as the economy continues
to slow down.
Yes, the latest GDP numbers could hint at a recession, which I'll
discuss below. But don't let that prospect scare you into
inaction. The important thing is to remember that, even if
the economy ends up shrinking, your potential for successful
investments need not necessarily suffer the same fate.
Are We in Recovery Mode... or Recession
Mode?
Economic certainty has become a growing desire among investors
around the world, especially since in the beginning of the year
what felt like building momentum has slowed to a bit of a crawl
here in the United States. In the beginning of 2012, the
Federal Reserve predicted the U.S. economy would grow by about 2.5
percent. That equates to an American economy that would be
$377 billion bigger this year versus last year.
It is now July 30th, the year is more than half over, and the
Commerce Department reported on Friday that the country's economic
engine (GDP), while moving forward in positive territory, is
slowing down for a second quarter.
Gross Domestic Product is the broadest measure of the nation's
economic health. And while it grew by 1.5 percent from April
to June, it is the second straight quarter where the numbers
fell. It is down significantly from a 2 percent rate in the
first three months of the year.
Why the slowdown? Some economists blame consumers, citing
that spending has been weak. Consumer spending makes up about
two-thirds of GDP, and Americans are still paying down debt and
being collectively frugal -- a smart personal finance strategy --
as they save approximately four percent of their household income
each paycheck. But... they aren't investing it or spending
it.
The trickle down effect is that company CEOs have been reticent to
invest in beefing up inventories, building new plants, buying
equipment or hiring new employees. They are uncertain as
well... after all, they're not seeing the dollars enter their
doors. Additional data show that there have been a number of
government cuts and a rise in imports from foreign countries, which
also affects GDP.
Does this mean we are headed for a recession?
A commonly accepted definition of a recession is two consecutive
quarters in which real GDP declines. However, the National
Bureau of Economic Research (NBER), says a recession is a
significant decline in economic activity spread across the economy,
lasting more than a few months.
Based on first- and second-quarter GDP data, it's possible we could
be headed in that direction, as there would be a lot of ground to
make up for the remaining months of this year to ensure overall
growth does not stagnate.
Another Fly in the Ointment...
This past June, the Federal Reserve Bank of Cleveland issued a
report highlighting the relationship between the yield curve and
predicted GDP growth. Understanding yield curve analysis can
arm investors with additional information about possible expansions
or contractions in the economy.
Here's what yield curve analysis in its simplest definition boils
down to. Economists and analysts usually will compare the
difference in yield -- known as a spread -- between two
investments. In the case of forecasting a recession,
economists usually will rely on studying the spread over time
between the U.S. Treasury bill and the 30-year Treasury
bond.
For 2012, here is a table from the Federal Reserve Bank of
Cleveland that shows their less optimistic view on the recession
front from April through June as a result of their yield curve
analysis:
How to Handle Times of Economic Stress... And Profit From
It
Benjamin Graham said,
"The individual investor should act
consistently as an investor and not as a speculator. This
means that he should be able to justify every purchase he makes and
each price he pays by impersonal, objective reasoning that
satisfies him that he is getting more than his money's worth for
his purchase."
Given the current economic weaknesses, and choosiness among
consumers on where to place hard-earned dollars, it pays to know
why it would be important to think like Graham offers, and make
sure you are getting your money's worth in an economy that could
head toward a recession.
Tough economic and market conditions saddle most companies with
operational and financial problems that aren't easily
overcome. What to do? Focus on consumer staple stocks
that pay sustainable dividends. People will always need to
figure out how to eat, heat their homes and buy toilet paper.
When money is scarce, consumer staples typically churn out profits
for the companies that manufacture and sell them. These
companies hold a well-fortified position of financial strength
during times of trouble.
One example of a consumer staple stock that could do far better if
this economy keeps slowing down is the number one food manufacturer
in the United States, General Mills (NYSE:
GIS).
Closely tied to the commodities market -- from pricing on grains to
plastic -- this company has come out stronger than any other food
company. And at the end of June 2012 the board of directors
approved an eight percent dividend increase for its common
stockholders. It sports a 3.4 percent dividend yield, and in
spite of a challenging five-year period for the capital markets
overall, the company increased their dividends per share at an 11
percent compound annual rate. The dividend yield has averaged
roughly three percent over the same period.
The company boasts one of the longest dividend histories in
corporate America. It has paid dividends, without
interruption or reduction, for 113 years.
That is the kind of history and financial strength to look for in a
consumer staple stock during a weakening economy.
If a recession is on the horizon, remember this: A recession
just means the economy is shrinking -- it doesn't mean that you
can't increase your investing income!