US debt has been downgraded from AAA to AA+ by S&P and unemployment is at 9.1%. The ECB has agreed to buy Italian and Spanish debt, but no one is sure how much. Asian markets are falling across the board and The AUD has fallen below parity with the USD for the first time in five months.
We are in a market that is becoming increasingly bearish each day. Although economists are not yet sure whether the US, and the rest of the world through trade and currency ties, will suffer a double-dip recession, it is worth looking at the industries that sink and swim in recessions.
Although it is possible to make a profit in a bear market, there are some sectors that perform worse than most in downturns, and would be wise to avoid.
1. Alternative energy
One of the best sectors during market booms, alternative energy is one of the worst industries to trade during a market crash. Still seen as largely speculative, alternative energy falls with falling markets as investors look for safer investments.
2. Retail
When consumer confidence is low, people shop less and save more. Speciality and luxury stores are the ones most likely to suffer, as staples like groceries and cleaning products become a higher priority. One good example is Macys in the US, whose shares plummeted from USD25 a share to USD5 in 2008, an 80% drop.
3. Casual dining
When people are saving rather than spending, they are less likely to eat out. And, as dine-in restaurants are more expensive than takeaway, they suffer the most.
4. Manufacturing
Manufacturing production numbers are a key economic announcement made by governments, and manufacturing numbers are always lower in a downturn. Not only that, but many companies outsource manufacturing to economies where labour is cheaper as the economy falls.
The US construction industry is at its lowest level in a decade; while Australia’s residential construction is not expected to improve until 2012 or 2013.
5. Cars
New car sales are driven by consumer confidence in the economy, with some victims of the global financial crisis including General Motors and Chrysler, which both went bankrupt. Toyota, Honda, Suzuki, Subaru, Ford, Peugeot and Renault were also among the sufferers.
Evidently, the sectors that depend the most on consumer spending are the ones that suffer during a market crash. However, there are some that benefit, or hold their value.
1. Discount retailers
While Macys may be falling, budget retailers often maintain their sales volumes, or even improve. In the global financial crisis, Big W, Dick Smith and Tandy all fared comparatively well in the gloom.
This time around, retailers like Target and Kmart have both been experiencing good volume growth, while office supplies chain Officeworks had a 4.4% sales growth and hardware chain Bunnings had a 5.6% sales growth.
In hard times, designers and producers of lower-end products often see an upswing as people leave the big brands to make their dollar go further.
2. Indulgences
While staples and discount goods may seem like a logical switch in a recession, people also indulge in guilty pleasures more in difficult periods. When they may have bought a new car or stereo in the boom, in the bust they will pass up the big-ticket items but maintain their nightly glass of wine, cigarettes or chocolates.
However, this isn’t the case across the ‘sin sector’ – casinos do their best business when the economy is going up, whilst gambling declines when it is trending down.
3. Repair and maintenance services
Although the service industry as a whole turns down with the economy, as people do more themselves to save money, some service providers will see an upswing. Typically, companies that specialise in upgrading and maintaining existing equipment and products will see their business increase, as customers try to make what they have last rather than buying a newer model.
A real estate industry saying is that renovators hire as builders fire, and this is true across the board.
4. Essentials
Essential industries will continue functioning regardless of the state of the economy. Although they may not rise, they won’t plummet like other industries that are seen as optional.
Some examples include tax service companies, healthcare companies, pharmaceuticals, grocery chains, waste disposal companies, grave diggers and energy companies. People will get taxed, get sick, eat and die in every economy. They will also keep using electricity, and transport will continue to run to get the materials to generate this energy to its destination.
The benefits of a recession
The biggest benefit of a downturn is that companies are required to trim the fat from their spending. Inefficiencies that would have gone unnoticed in better times need to be cut, which is good news for investors as surviving companies have the potential to emerge stronger.
A recession can also be a good thing for investors, as it is easier to spot a strong company when the rest of the market is falling, while traders can implement a bear market trading strategy.
However, although it is good to know which industries benefit from downturns, it can be difficult to trade according to economic cycles. A trader with a strategy based on a recession will need to keep a close eye on the market so he can adjust his strategy when it rebounds.