Double dip recession fears spook world markets. We're on course for a drop of crash proportions. Should you sell now?
Newsflash.
- FTSE plunges below 5,000.
- Dow slumps below 10,000.
- Chinese growth weakens.
- American consumer confidence falls.
- Europe still in debt.
- A Brit still in Wimbledon.
Alert, alert…
Economy, we have a problem. A global double-dip recession could be on the cards.
Yields on 10-year US Treasuries, the global benchmark for future inflationary expectations, dipped below 3%. In the Financial Times, David Ader at CRT Capital said "Yields have priced in a huge amount of bad news for the economy during the second half of the year."
Deflation is the market's new reason to be fearful. Markets are jittery, to say the least. The Great Stock Market Rally of March 2009 to April 2010 has quickly been confined to history. Since peaking at 5,833, in the middle of April, the FTSE has plunged almost 16%.
A Painful, Fearful Drop
A 10% drop is commonly known as a correction. A 16% drop is painful. A 20% drop might be called a crash. The near 50% fall we had from the FTSE's 2007 peak to its March 2009 bottom is commonly called wealth destroying and pretty flipping depressing.
If a 20% fall is known as a crash, we're mighty close to crash territory already.
Markets are super-fearful right now. The fear gauge, otherwise known as the VIX index in the US, soared 18% to 34. According to Bloomberg, the index, which measures the cost of using options as insurance against declines in the S&P 500, is way above its two decade average of 20.
So, what's ahead for battered and bruised investors like you and I?
The Dreaded Double Dip Recession
As ever, the future is uncertain. That said, I doubt we'll be looking at a full-blown financial crisis like we had back in October 2008. Those events come around once in a lifetime.
Maybe there will be a double-dip recession. I've been saying for quite some time now that I expected a tepid economic recovery -- a drawn out period of slow economic growth, coupled with continued very low interest rates. We may even fall back into negative growth territory for two quarters in a row, the dreaded double dip recession.
It's not a reason to suddenly abandon the stock market. If nothing else, the events of October 2008 to April 2010 should have taught investors some very relevant lessons. In times like these, it's worth remembering strong companies with modest levels of debt get through recessions largely unscathed. Sure, their valuations take a beating in the darkest days, but their cash generation and dividend paying records remain intact.
4 Companies Growing Out Of Recession
For example, look at the record of these companies. Taking 2008 as the base year, the year prior to the recession really hitting, and looking forward to 2011 forecasts, their dividend and earnings growth records are very impressive.
| Company | 3-year F'cast
Dividend Growth | 3-year F'cast
Earnings Growth | 2008
Average P/E | 2011
Forecast P/E |
|---|
| Tesco (LSE: TSCO) | 43.0% | 26.2% | 16.1 | 12.2 |
| Unilever (LSE: ULVR) | 41.2% | 17.2% | 14.8 | 12.7 |
| GlaxoSmithKline (LSE: GSK) | 26.0% | 12.7% | 11.7 | 9.2 |
| Smith & Nephew (LSE: SN) | 77.8% | 45.6% | 24.3 | 12.1 |
As you can see, the main thing that's changed about each company is its P/E ratio.
Dreaming Of Such Cheap Stocks
Which brings me onto why we should not expect another almighty stock market crash. This time around, valuations are relatively modest. I counted 25 FTSE 100 companies trading a forecast P/Es of less than 10.
I used to dream of buying decent companies at such modest valuations. Today I feel like a kid in a candy store.
Now admittedly, many of those cheap stocks are companies I'm steering well clear of, including the big miners like Rio Tinto (LSE: RIO) and banks like Barclays (LSE: BARC). But there are plenty of others to choose from, including Glaxo, Royal Dutch Shell (LSE: RDSB) and Vodafone (LSE: VOD), all of which I have positions in.
Genius Or Imbecile?
Just over a year ago, I documented the reasons as to why I sold my entire holding in Barclays at around 300p. In the ensuing 12 months, I've looked like an imbecile when the shares hit 380p in October last year, and a genius on days like today, when the shares trade around 270p.
Such is life as a stock market investor. Genius one day, idiot the next. Yesterday we all looked like idiots, especially if we owned big fallers like Carpetright (LSE: CPR) and Yell Group (LSE: YELL). Today is a new day. Anything could happen tomorrow.
In this day and age of instant news, cheap fees and electronic trading, share prices can move quickly. They are cyclical. They were up in April, down in May, up again 2 weeks ago, and down again today.
Your goal as an investor is not to sell when share prices are at a cyclical low. As such, I wouldn't be a seller today. If you were in the selling mood, April was your time to do that. It's a buyers market today.
More on the economy and the markets:
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> Bruce Jackson has positions in Shell, Vodafone and GlaxoSmithKline.
