This column was originally published on RealMoney on Aug. 10 at 1:03 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
So Ben Bernanke paused, and now everyone's confused.
Is the economy really slowing?
Will there be a recession?
Is there inflation?
Is there stagflation?
Everyone assumes when there is a recession that the market has to go down.
But my feeling is the stock market doesn't necessarily care if there's a recession. We know three things:
- The Fed will start stimulating again in an actual recession, and rates will go down.
- Stocks get cheap, and many stocks trade below cash.
- Not every stock goes down in a recession.
I took a look at all of the recessions since World War II.
First off, I looked at yields on the 10-year note. Yields fell during 10 ofthe 11 post-World War II recessions.
The onlytime they didn't fall was the recession of November 1973 toMarch 1975, when the yield on the 10-year went from about 6.7% to7.5%. So far, so good -- I could use some lower yields.
For the stock market, the data is a little more mixed. While we would expect recessions not to be great for stocks, they don't seem to be horrible either.
Across the 11 recessions, themarket has gone up during six of them (1945, 1953, 1960, 1980, 1981 and1990) and down during five (1948, 1957, 1969, 1973 and 2001). Onaverage, across all 11, the market was dead flat.
Granted, 11 isn't a big number and the volatility is quitelarge across the sample (the worst was a 22% drawdown during the 1973recession, and the best was the 21% post-World War II bump during the 1945recession).
Still, I like to get the facts straight before gettingall flustered about a recession. Then the next question to ask is:What stocks did the best in the last recession?
The trucking company
rose 30% during the 2001recession from $17 to $23. Now it's near an all-time high at $44.That said, all the metrics look good. Return on equity is ahealthy 20%, and at the moment, it's trading at a meager 4.2 timescash flow with EBITDA at $225 million and their enterprise value (marketcap minus net cash), coming in at $963 million.
Another excellent pick right now is
. During the 2001recession, Penney went from $14 to $21 -- a 50% return. It'slogging a 22% return on equity, with a great balance sheet ($2.7 billionin cash, $3.4 billion in debt, but EBITDA of $2 billion -- more than enough to paydown debt quickly if it so chooses), and it's tradingfor a multiple of 7.5 times enterprise value over EBITDA, putting it squarely in LBO territory. Additionally, I think the market isundervaluing its highest growth asset, jcpenney.com, which has beenposting faster sales growth than walmart.com.
I think it's important to not speculate too much on the unknowable, oron the areas where it's impossible to get an edge. Seek out thefacts, and then act accordingly.
10-Year Yields In The 1980 And 1981 Recessions
Note: Blue arrows indicate the start of a recession, red arrows the end
At the time of publication, Altucher and/or his fund held none of the issues mentioned, although positions may change at any time.
James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of
Trade Like a Hedge Fund
Trade Like Warren Buffett
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;
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