Roger Nusbaum
This column was originally published on RealMoney on Sept. 10, 2007 at 11:46 a.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
The release of the seemingly rotten employment numbers last Friday has opened many more people up to the possibility of a recession. This article will not focus on whether there will be a recession
. I do, however, suggest what to do with sector weightings within your portfolio to try to ride out a downturn until the next cycle begins.
Financial sector -- 19.81% of the S&P 500: A precursor to a recession is often an inverted yield curve . Curve inversion impedes success within the financials, and the best thing to do when the curve inverts is to simply underweight the sector . I first started expressing concern about the slope of the curve about a year-and-a-half ago.
My preference for the time being is to remain underweight, favor high-yielding foreign banks and wait for the yield curve to normalize before adding volatility back in with the brokerages or exchange stocks. I would not want to own small or volatile or narrowly based companies (like mortgage only) until the yield curve normalizes.
Tech -- 16.35%: Tech is an area where you can get very divergent opinions, but I remain underweight the sector. The bull case now is compelling because tech has struggled for so long, growth has lagged value for ages and all the cash that companies have on their balance sheets should lead to increased spending on capital expenditures, which, if it happens, would benefit tech.
For now, I think the bull case relies on too many "shoulds," but if we are in for a slowdown/recession, I would expect semiconductors to lead off the bottom, as they usually do. Semis are an early-cycle play because they are an elemental component in almost everything we buy.
Health care -- 11.73%: Health care stocks usually do well during recessions because the demand for their products is inelastic. No matter what is going on in the economy or the world, people will still take their heart pills or blood pressure medication. The aspect of safety (and in some cases, the yield available) draws investment demand. This bodes well for stocks like Johnson & Johnson (JNJ Quote - Cramer on JNJ - Stock Picks).
This is a sector that I would want to be overweight during a recession, and additionally, the graying of the boomer generation offers a fundamental demographic play.
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