Investors Act As If Recession Here


WHEN the market starts sensing a possible recession, that usually portends a movement of dollars toward recession-resistant consumer and service stocks. Ironically, notes Larry Wachtel, an analyst with Prudential-Bache Securities, the stock market has been behaving in a way that suggests the US is already in a recession. Typical recession-resistant stocks have already become the big players on the market, and may be starting to wane, he says.

``For at least the last six weeks, the leading sectors on the market have been the recession-resistant stocks,'' such as food and drug companies, utilities, supermarkets, and service firms. In other words, says Mr. Wachtel, despite the climb in the market in recent weeks, investors are ``acting as if a recession were at hand.

``But there is no recession at hand,'' Wachtel adds. So what is happening, he says, is that the financial community has already ``discounted'' the benefit to the consumer groups, the traditional recession-proof stocks. The upshot, as Mr. Wachtel sees it: Many investors are now turning away from the consumer stocks to such nonrecession stocks as cyclicals. Sectors suddenly attracting investor interest, he says, include paper companies, metals, and aluminum - hardly the lineup expected as a hedge against recession.

Whether the investment community will move completely away from the consumer-service groups in the period ahead is unclear, given uncertainties about the direction of the economy.

Wachtel's observation on recession-resistant stocks is substantiated by performance charts. The service-oriented sector of the Standard & Poor's 500 Stock Index has sharply outperformed the nonservice-oriented or manufacturing sectors.

John Laporte, president of the T. Rowe Price New America Growth Fund, which invests in service-oriented growth companies, notes that the service sector of the overall gross national product has not experienced a down year in more than 40 years. Service companies, Mr. Laporte notes, tend to be less capital intensive than manufacturing firms. That means that they have lower fixed costs and can be more flexible in adapting to changing market conditions, including recession.

Mr. Laporte does not believe that the service stocks have yet played out their hand, in terms of growth, nor that the cyclicals will necessarily play a good hand in the period ahead. If growth becomes very slow or worse, he suggests, earnings will be negligible for the cyclicals. And that, of course, bolsters the case for the service sector, which tends to post good earnings even in a slowing or recessionary climate. The New America Growth Fund increased 27.6 percent for the first half of this year, well above the broader market. The Dow Jones industrial average rose 12.5 percent during that same period.

Robin Young, director of research for John G. Kinnard & Co., an investment house based in Minneapolis, argues that if a recession occurs, it can be expected to have an impact on all industries and companies, thus affecting stock prices in general.

But at the same time, Kinnard & Co., Mr. Young notes, is leaning on the cautionary side regarding individual stocks. Kinnard holds that the period ahead carries special risks for the market, given the threat of recession. Thus Kinnard recommends that investors should adopt a two-pronged strategy:

1. Investors should begin a ``measured profit taking program selling into this market's remaining strength.''

2. Investors should retain only shares whose valuations ``are below-market multiples'' or whose prices perform well in recessionary or lower-interest-rate environments. And, says Young, for Kinnard that means such service stocks as utilities, savings and loans, banks, select consumer product companies, and ... well ... even pawn-shop operators, although that may not strike every investor's fancy.

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