Corporate America is in a recession, and the broader economy may not be too far behind. Slower sales and higher energy and labor costs battering corporate America are already raising fears that the economy, rattled by housing woes, may shrink in 2008.
Corporate profits crumbled at an annual rate of $19.3 billion in the third quarter of 2007, as domestic earnings fell $41.2 billion. That came as Q3 profits for S&P 500 companies fell close to 25 percent, and as corporate America announced some 25,000 job cuts for 2007 alone.
Sure, there are those who don’t believe a 2008 recession is imminent, like Larry Kudlow and the quarterly UCLA Anderson forecast. But for argument’s sake, let’s say recession risks are highly elevated, which the Congressional Budget Office and a Merrill Lynch economist just warned about on Wednesday.
Housing remains weak. There’s a tighter supply of credit, as well as lower business and consumer confidence. And crude oil is up 60%, which could hurt growth, making for the perfect recessionary storm.
While it’s impossible to know what’s coming next, you don’t sell in panic mode. You buy opportunities in crisis and small-cap stocks. Here’s why.
Small caps were king during previous recessions.
- When the economy shrank from July 1981 to November 1982, the small-cap Russell 2000 was up 9.4%, while the S&P 500 gained 5.8%.
- From July 1990 to March 1991, the small-cap index was up 5.9% as compared to the 5.4% S&P 500 gain.
- And from March 2001 to November 2001, small caps added 2.3%, as compared to the S&P 500’s 1.8% gain.
Again, you don’t sell in panic mode. You buy small caps, opportunities in crisis, and those with limited exposure to sub-prime and housing, such as drug stocks. Even in times of economic uncertainty, people still need their prescription drugs. They’re recession-proof.
How many people are going to not buy blood thinner medication because of an economic slowdown? The choice is simple. Take the medication or die. People still get sick in a recession. If memory serves me right, I once caught a cold during a recession. Good news for drug stocks.
What’s more, get excited about this: From the start of 2000 to the tail end of 2003, the S&P 500 fell about 20% as the economy headed south. At the same time, the AMEX Biotech Index was up about 25%.
Small Cap Trading Pit just revealed one biotech to own today. Check it out at http://www.sctradingpit.com.
Ian L. Cooper