Profit From A Recession
January is traditionally a time of massive mutual fund inflows. At the strike of the New Year money starts flowing into 401Ks and other retirement vehicles. Investors like you and I also have New Year’s resolutions that focus on retirement. Sometimes it’s as simple as rebalancing our portfolio but most of the time it means investing more money.
All of this new money needs somewhere to go and typically flows to mutual funds. Portfolio managers need to invest this new money quickly or fund performance can fall. The size of the inflows (measured in tens of billions) normally has a very positive impact on the market. When coupled with the repurchase side of tax loss selling, we experience the “January Effect” which is simply a cyclical rally in the markets.
But this year has been different.
On January 2, the first trading day of the year, the market fell 220 points. The market closed out the first week of trading, a few days later, with the Dow at 12,800. The Dow has now fallen 565 points in the worst, first week of trading seen in decades. Needless to say, it was not the bright start to the New Year many investors were expecting.
Unfortunately, many look at the first trading day, and the first trading week as a barometers for the entire year. With the recent poor performance, many investors are now fearful. Throw in fears of recession and outlooks turn bleak very quickly.
Might a recession do us in?
Investor concerns are high given falling home prices, tightening credit markets, the decline of the US dollar, and rising commodity prices.
Now, I’m not an economist, but 10 years of banking taught me something. Economists are constantly yelling “recession, recession” yet they tend to be wrong more than they’re right. This has led to the famous saying: “Economists have predicted 8 of the last 5 recessions.”
The way I see it is this. If enough investors feel like we’re entering a recession, they’ll shift their investment portfolios. For us to profit from that move, we need to be ahead of the pack. To invest during a recession quality is strategy number 1. Focus on companies and industries that grow and are profitable in any economic environment.
One of my favorites is alcohol.
Now, I don’t mean drowning your sorrows and spending your life savings at the local pub (as appealing as that sounds).
But, alcohol sales have been growing steadily for years. In 2007, we noticed a resurgence in the beer industry. The craft beer market showed phenomenal growth.
Beer is truly an economic, independent consumable. What do I mean by that? In good times and bad, everyone drinks beer, and the beer companies make money.
If people aren’t throwing back a few pints at the local pub, then chances are they’re probably drinking at home. The numbers don’t lie.
These are the type of companies we need to invest in during a recession – or fear of recession. Many alcohol producers make quality products, two of my favorite are Molson Coors Brewing (TAP) and Anheuser-Busch (BUD).
You might be familiar with a few of their products; I have some in my fridge now. Molson makes Coors Light, Molson Canadian, Coors, Killian’s Irish Red, Keystone, Blue Moon and Zima. At 50% market share, Anheuser-Busch makes the most popular beers in all of America, Budweiser and Bud Light.
Adding these companies to your portfolio can be a good way to profit from a recession . . . or fear of a recession. Both companies are profitable and sell products people demand in good times and bad.
Bottoms up!
Category: Bonds
