Sunday, September 16, 2007

Recession and the effect on Stocks

What is Recession ?
Recession can be defined as a decline in a country's GDP(Gross Domestic Product) in two consecutive quarters. In a broader sense it would mean decline in the economic activity across the economy. The low economic activity will directly affect job growth, corporate profits and new investments.

Stocks would decline considerably during a period of low economic activity as earnings would drop and low future earnings translate to lower stock prices.

Consumer Discretionary stocks will be affected the most. These are companies whose products are discretionary in nature- for e.g. automobiles, durables, hotels, restaurants, media, leisure etc. Some companies in this sector would include: Comcast, Home Depot, Amazon, Target, McDonalds, GM, Starbucks, Harley Davidson etc.

Consumer Staples are a good place to hide during recession. These are companies whose products provide essential services and would remain in demand when the economy is down. Some products in this category are- food, drug retailers, beverages, tobacco, household products, personal products. Companies in this sector- Walmart, Procter and Gamble, Coca-Cola, Altria, Walgreen, Colgate, Safeway, Whole Foods etc.

2 comments:

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