It is no secret that the U.S. economy has been in an extended recovery phase since the Great Recession in 2009. This seven year recovery has proven to be among the longest and weakest in the history of the United States. Since the year 2009, the American economy has expanded by a tepid 2.1% annually. In the past quarter, it only grew at a disappointing 1.1%. These numbers qualify the recovery as the slowest one on record since the end of the second world war. Third quarter results will be out in late October. Lately the signs and economic indicators point to a weakening economy. Fortunately there are five actions you can take now to protect your portfolio from a significant market pullback.
Job Market Numbers Weaker than Expected
Economists were looking for a stronger jobs report than they got in August. The actual number showed that the employment market expanded by 29,000 fewer jobs than observers had anticipated. Fewer jobs mean less money for consumers to spend. Consumer spending represents the majority of the entire U.S. economy. When this category takes a hit, you can be sure that economic trouble is not far away.
Transportation Industry Warning
The transportation sector has historically been among the first areas to show weakness when the U.S. economy starts to decline. The U.S. Bureau of Transportation Statistics report argues that changes in the transportation index happen before the economy’s growth alters. This index measures train, truck, plane, and boat activity. It is so useful in predicting economic activity because it combines rail ton miles, weekly rail carloads, monthly truck tonnage, freight and mail air revenue, and tonnage shipped by water and pipelines into one all inclusive economic indicator.
As demand for goods downstream begins to weaken, freight shipments deteriorate. This indicator leads the overall economy by typically four months. During the beginning of this summer in May and June, the index began to display a negative shift, per CNBC. As the chart below shows, this Freight Transportation Index is down 3.2% for the May/June 2016 year over year period.
The Bureau of Transportation does not argue with this indicator and its logic. A spokesman for the BTS, Dave Smallen, commented, “We agree that the TSI can be useful as an economic indicator. Our past research has shown that a peak in freight TSI has almost always been followed by either a recession or a growth slowdown.” This May and June Freight Transportation Index decline argues for either a recession or a significant economic pullback around October.
Auto Sales Are Falling
Corporate earnings in the U.S. have actually been declining for several years. The S&P 500 corporations have reported falling earnings since the year 2014. Amid this discouraging news, auto sales had been a bright spot. They had risen for 66 consecutive months. This began to change six months ago, but the August release showed a significant plunge. Yahoo Finance revealed that the August numbers came in at 1,512,556 down from 1,577,407. This represented a shocking drop of 4.1%. Over the last six months, the retail auto sales have decreased in four of them.
The CEO of Ford recently said he anticipates the car industry will actually sell fewer vehicles this year than last year. He believes sales will decline still more than this in 2017, per The Wall Street Journal. The car sales declining numbers and predictions represent yet more evidence that the consumer is already putting off major purchases and pulling back.
U.S. Manufacturing Industry Sectors Shows Contraction
Even as the Freight Transportation Index predicted at the beginning of the summer, the economic data in two key areas of the economy is showing significant weakness now. The ISM Institute of Supply Management Purchasing Manager’s Index measures economic expansion when the results come in above 50 and contraction when they are under 50. Just last week, the ISM revealed that this important PMI declined from 52.6 for July down to 49.4 for August. This is so critically important because the below 50 number indicates recession. While the U.S. manufacturing sector is not the largest component of the economy, it is important.
Services Sector Also Contracting
It is not only the manufacturing sector that is struggling lately. The services sector is the largest single part of the U.S. economy. These businesses cover such industries as banking, professional services, and hospitality. The August ISM Services Index declined to 51.4 from its July reading of 55.5. Economists and analysts had been looking for the index to reach 55.0. The August reading proved to be the lowest such print since the number in February of 2010. The 51.4 was still in expansionary territory, but it is a sharp decline.
It provoked greater concern because the drop in the all important services sector occurred in the same month as the manufacturing sector decline. MarketWatch commented on why this is so disturbing. “It’s unusual that both indexes would soften so much at the same time. The combined reading of the two indexes was also the weakest in six years. Since these indexes often track closely with gross domestic product, the surprisingly poor turn has not gone unnoticed.”
Five Ways to Protect Your Portfolio from Recession
The weakening economic data is compelling evidence that you should prepare your portfolio for a downturn or even recession. Here are five ways that you can be ready when it hits the markets:
• Stay away from debt ridden companies – companies that are strapped with debt have a difficult enough time paying their creditors when the economy is strong and expanding. It becomes next to impossible when the economy significantly weakens. Sell your shares in companies that are excessively debt ridden.
• Favor defensive stocks – stocks in sectors that are defensive can still make money and pay dividends when times are hard. This includes consumer staples like food, healthcare, and even tobacco. Avoid companies that require superfluous consumer spending to thrive, such as restaurants, retailers, and airlines.
• Sell stocks that are richly priced – stocks which are highly valued generally fall more than stocks that are cheaply priced when the market declines.
• Move assets into cash – by taking Goldman Sachs’ end of July advice to sell stocks and go to cash, you will be well positioned to purchase the best companies at bargain prices after the market pull back finishes.
• Buy some physical gold – gold has preserved purchasing power for thousands of years. This tangible asset does well in times of economic uncertainty and fear. You can easily buy and sell it in any country and currency of the world.
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