“That was a diaspora of labor across the country, and so you now have labor mismatches in cities and other states. You also have mismatches to the housing market. Folks needed housing when they went to these places, and so that drove up housing prices,” he said. “These two other relatively large imbalances are feeding into inflation. To really get inflation under control, you really need to solve these major imbalances. The signs are so far that we’re really in the early innings of solving those imbalances. The risk really is that they do too little, and that inflationary impulse just persists year after year, which makes it harder to bring down.”
While historically stock prices peak about seven months before a recession begins, they often recover and rise at an accelerated clip up to two years after the economy first contracted, Capital Group research showed.
Indeed, Spence said he found that a bear market without a recession saw a median market decline of 20% and it lasted five months. But with a recession, the decline was 34% and the duration of the bear market was 17 months. “So they can drag on for almost a year and a half. And the reason that these bear markets are worse is pretty straightforward, it’s because earnings go down in a recession,“ he said.
For investors, while the waters may be muddied, they’re not unnavigable, the panelists said, if they’re willing to look at sectors that have room to grow in the current environment.
For example, Toner, who said he’s described himself as a defensive investor even in good markets, said he’s focusing on a few sectors where he’s found consistent value of late, including tobacco, and base metals and precious metals miners.
“You’ve got a lot of companies that are being much better run than they have been in the past, and their capital deployment has appreciated dramatically,” he said. “These companies have had very high dividend yields, and they’re engaging in very meaningful buybacks.”
And in the areas where Toner said he’s playing offense, he’s looking for tailwinds behind the industry and reasonable valuations within it. Healthcare is one area, he said, as is aerospace and defense.
Other sectors that hold up well in recessionary times tend to have a strong dividend correlation, Franz said. In particular, companies in consumer staples, healthcare and utilities. Real assets also do well in periods of high inflation, he said, as well as potentially factory automation companies as manufacturers try to re-shore their businesses.
“It’s probably not a coincidence that some of these pay pretty high dividend yields. In periods like we’re in, dividend stocks, high yielding stocks, tend to do better than the market overall,” Toner said. “When I’m investing in companies with good dividend yields, one thing I’m looking at is the sustainability of that dividend, and the company’s ability to grow that dividend through cycles. If you can pick some of those stocks up at attractive prices, those are the stocks to hold onto when the sledding gets rough.”