Value Investor Daily #53

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The last few years have been a rollercoaster for the economy. We've endured a pandemic, seen war break out, battled historic inflation, experienced catastrophic weather events, and much more.

All of these things impact the economy, yet economists remain optimistic that a recession is unlikely in the USA.

Depending on who you ask, the likelihood of a recession occurring in the near future is between 15% and 45%.

The Bloomberg Consensus chance of recession sits at 30%.

JP Morgan is on the pessimistic side of the fence, with a 35% probability of a recession before the end of 2024 and a 45% probability of one in 2025.

Meanwhile, Goldman Sachs is more optimistic—just 15%. The unemployment rate fell recently from 4.253% to 4.054%, causing Goldman to lower its recession probability.

In September, The Fed lowered interest rates in response to unemployment figures, but many economists fear the response may be too late.

When the war in Ukraine started, the United States felt the economic shock of 40% higher gas prices. While the effects of this have somewhat stabilized, continuing geopolitical tension and uncertainty could be hampering economic growth.

The Conference Board Leading Economic Index declined by 0.5% in September. As measured by the Consumer Price Index (CPI), inflation is projected to drop to 2.1% in 2025. Taken together, both indicate the economy is expected to cool next year. Meanwhile, The Fed still has room to slash interest rates.

What could the election mean for the economy?

Tariffs will likely increase under a Trump administration, but he will push for other tax cuts. Energy prices may fall as he promotes increased domestic oil production, curtailing further inflation.

Kamala Harris wants to bolster the economy with tax credits for families, small business owners, and low-income housing builders. However, plans to stop price gouging may lead to supply constraints and, ultimately, more inflation.

The economy has been steady under both parties for the last 24 years.

Here’s the overall average GDP growth under the last four presidents:

George W. Bush (R) - 2.4%

Barack Obama (D) - 2.3%

Donald Trump (R) - 2.3%

Joe Biden (D) - 2.2%

These are unusual times, however, and any incoming government will have to deal with conflicts in Ukraine and Palestine, additional rising geopolitical and domestic tensions, inflation, unemployment, a changing technological landscape from AI to cyber security, and more.

How can you prepare for the unknown?

While recession probability is low, it could tick up if geopolitical conflicts escalate or inflation reaccelerates.

Focus on consumers. Consumer Staples was the best-performing sector in the 2008 recession.

People will always need essential goods, diapers, toilet tissue, etc., so these businesses are less likely to take a significant hit if people's discretionary spending drops.

Value investors could lighten up on any overvalued stocks hidden in their portfolios to better weather any coming storms.

Buffett’s Berkshire Hathaway (BRK.A) holds $276 billion of cash for a reason.

Consumer stocks such as Kimberley Clark (KMB) offer a relatively low-risk option if a recession occurs. They trade under 18X earnings vs. 31X for peers Church & Dwight (CHD) and 29X for Proctor & Gamble (PG).

Also, consider Target (TGT). It trades at 15.5X earnings vs. Costco (COST) at 55X and Wal-Mart (WMT) at 35X.

It never hurts to get defensive in advance of turbulent times.

Thank you for reading today!