Markit Economics' flash services purchasing managers index (PMI) slipped to 49.8 from 53.2 in January for the first time since October 2013. A reading below 50 suggests that there will be a contraction in the economy and reflects a lessening in consumer demand.
It was just the latest sign of a slowdown.
The index of leading economic indicators (LEI) showing a negative figure for the second straight month. Three continuous months of declining LEIs are generally signs that a recession will soon occur.
The manufacturing, financial services and technology sectors have shown signs of decline, while energy markets continue to struggle. Consider that the manufacturing PMI dropped to 51 in February from 52.4 in January. This edges closer to the danger mark of 50.
Low oil prices have weighed heavily on many businesses, but perhaps most of all on banks, which have high exposure to the sector. According to Bloomberg, European banks such as BNP Paribas, Societe Generale and Credit Agricole among others, have exposure to the energy sector in excess of $100 billion. For U.S. banking stocks like Citigroup, JPMorgan Chase and Wells Fargo, crude oil woes are threatening to eat into revenues from other verticals such as the capital markets business.
There doesn't seem to be much respite for crude oil prices, what with the U.S. shale field pumping copious amounts of oil and the advent of more cost efficient electric cars threatening to erode demand for gasoline.
In alarming signs of what may be a tech bubble, tech stocks such as Twitter and LinkedIn are rapidly losing value. While Twitter is not adding users, Yahoo, Microsoft and HP are laying off workers.
How you should act in these markets?
The stock markets have recorded an average fall of 37% during the peak to trough of the last 6 recessions. According to recent data from Credit Suisse , the average peak-to-trough performance of the small cap (Russell 2000) and the large cap (S&P 500) from one year before the start of each recession to the end of the slowdown showed that large caps were more resilient than small caps on the way down, but during the recovery, small caps performed better.
So, in the worst-case scenario that a recession does occur, large caps would be a safer bet. In the 2008 recession, construction, manufacturing, and real estate sectors suffered but education services and health services came out with flying colors. Stocks of Wal-Mart benefitted as buyers preferred discounted stores and others such as McDonald's, Netflix and Hershey also beat the recession.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.