Will there be a recession? Are we already in a recession? Maybe. Perhaps. We don’t know, and probably won’t know until months or years from now when we can look back at the history and see the whole story.
Still, some of the investment strategies that are working for investors right now seem substantially similar to strategies that should work in a recession.
We experienced a prolonged outperformance of growth stocks where valuations became so high the stock prices were not justified by earnings. Generally, growth commands a premium in the marketplace. For example, when valuations are high, you could be paying $35 in stock price for every $1 in earnings, when normally you’d pay around $20. That run was great for those invested in a growth strategy. With the prolonged bull run in growth stocks, it even worked out for those who invested when the market was high because it just kept going higher.
Right now, we are seeing a rotation toward value stocks—those with relatively cheap valuations relative to their earnings and long-term growth potential. They traditionally also have predictable business models, modest earnings, and likely a dividend, as they can return cash to shareholders rather than reinvest it to generate faster growth.
We don’t believe this shift is a short-term phenomenon where we will experience a year of value over growth, then go back to another bull run in growth stocks. That said, do we recommend sticking with what is “working” right now?
Given underlying conditions right now, we recommend cutting back on consumer-sensitive stocks, preferring to focus on Utilities, Staples, and Healthcare—sectors that traditionally outperform in times of economic recession. Gross domestic product came in at 2.6% during third quarter 2022, and while we don’t believe it will fall off completely in the fourth quarter, we are seeing slowdowns and indications that slower times are likely in the coming months; therefore, we believe taking a defensive position with your portfolio should be beneficial for most investors.
We’re not saying that you can blindly choose value stocks. You shouldn’t just look at valuation and P/E ratios, see that it’s cheap, and expect the stock to do well. Companies still need fundamentals like strong financials, solid balance sheets, effective cash flow, and foreseeable earnings.
While the future doesn’t look as bright as we’d like, things haven’t fallen apart either. Even though the mid-term elections didn’t result in a tidal wave in either direction, the market tends to benefit when any outcome eliminates uncertainty. Signs point to gridlock in Washington, which is also typically good for stocks, as we’re not likely to see corporate tax hikes and stimulus spending or debt ceilings rise that could increase the chance of default.
While we will likely have a recession, we suspect it is unlikely to be as deep as we’ve seen. Take stock of your long-term performance compared to what your goals are for your portfolio. You may need to rebalance your portfolio, trimming positions that have grown too large or by directing new funds into underweighted positions. This can help you manage taxes too.
If you have questions regarding the diversification of growth and value in your portfolio, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the November 19, 2022 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
