There is currently no shortage of commentaries about how the economy has peaked and that a recession is near. Most recently, experts are pointing at data from the Institute for Supply Management’s (ISM) manufacturing index, which fell to 49.1 in August from 51.2 in July, as another omen of a slowing economy. A decline in the ISM index, which typically gauges factory activities in the U.S., is considered an indicator of shrinking manufacturing activity. There's also the argument that a in the ISM index happening at the same that the U.S. bond yield curve inverted has a historical significance in that the two events occurred prior to the 2007-2008 recession.
Since there isn't a recession button somewhere that some operator could switch on at will, none actually knows when a recession is coming, if at all it's around the corner. If history is any indicator, however, a recession will come sooner or later. So for long-term investors, this isn't a time to panic. It's rather a time for a portfolio audit, ensuring adequate diversification and that there isn't an excessive exposure to recession prone assets. Here are some industries that typically topple in a recession.
Casual-Dining Restaurants
A report, titled "Changes in Eating Patterns and Diet Quality Among Working-Age Adults, 2005-2010," found that food away from home spending during the last recession ped by approximately 13 percent. The job and wage loss from the recession didn't only mean that people had tight budgets, they also have enough time to prepare food at home. Casual dining is mostly a discretionary business and is likely to take a hit when people cut down on discretionary spending.
Residential Construction
It's hard to tell the story of the last recession without mentioning the housing boom that preceded it. That alone is enough reason to be cautious of excessive exposure to the housing industry in general. For residential construction, in particular, the challenges for the industry are similar to that of casual dining. Consumers typically cut down on home purchases during a recession. This could be bad for both the top and bottom lines of residential construction companies.
American Carmakers
As mentioned above, adequate diversification is the most effective way to reduces the effect of a recession on one's portfolio. The same goes for companies and American automakers including Ford Motor Company (NYSE: F) and General Motors Company (NYSE: GM) aren't adequately diversified. In Q2, Ford $24 billion of the $35.8 billion revenue that the company made came from North American markets. For GM, North America brought in $28 billion of its $36 billion Q2 revenue. Therefore, a recession in the American markets won't be good news for these automakers.
Rule of the Thumb for Shielding Against Recession
While the industries listed above typically struggle in recessions, some stocks in the so-called recession-proof industries would still suffer. When preparing your portfolio for the recession, you may want to look into your holdings individually and reduce your exposure to assets that are heavily dependent on a single revenue stream or a geographical region for its sales.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
