By Andrey Dashkov, analyst, Casey Research
Yesterday, the market had one of its worst days in years.
On September 13, it crashed by over 4%. Swings like that haven’t happened since the COVID pandemic.
The reason, of course, was the latest inflation release. In August, consumer prices were 8.3% higher than in August 2021.
The number topped forecasts, and the market went into a selling frenzy.
Higher inflation means that the Fed will continue hiking interest rates. That, in turn, means that the economy could suffer. Higher interest rates tend to be bad for economic growth.
Bloomberg analysis puts the probability of a recession at 50% now, the highest it’s been since the depths of the COVID pandemic in 2020.
If a recession happens, how will the stock market react?
I’ll tell you in a moment what could happen next – and how you should prepare.
Company Earnings Could Do… Surprisingly Well
At least that’s what a recent analysis done by Bloomberg says.
Looking at the long-term history of recessions, the numbers aren’t too bad.
Between 1960 and 1981, the average peak-to-trough decline in company earnings was about 13%.
In 1990, 2001, and 2009, earnings fell by over 61%.
But the more recent recessions had one feature the economy doesn’t currently have: excesses. Back in 2009, for example, the housing market and excess leverage created an economic timebomb.
Things aren’t as crazy now. The housing market is not running hot and the U.S. economy is in better shape. Unemployment is low and household balance sheets look good with high asset values and liabilities under control.
The financial sector doesn’t have too much leverage, either. Its debt-to-assets ratio is 17%. Before the crash of 2008-2009, it was more than twice as high.
Corporations’ balance sheets are also less leveraged. Their debt-to-assets ratio is 24% vs. 39% before the Great Recession.
In other words, the economy is doing quite well when compared to past downturns…
So, What Should You Do?
Our number one here at Casey Research is to buy “when there’s blood in the streets.”
This week, the market has delivered massive volatility. The streets are definitely dangerous.
But it doesn’t mean that you should join everybody else and liquidate stocks.
Even if the market is right and a recession is coming, the best businesses will be able to navigate it.
Review your portfolio and check our latest portfolio updates.
This week, we issued a Super Spike Advisory profit alert for a gold mining company. We recorded double-digit gains on its shares and warrants – even as the rest of the market was tanking.
And in the most recent issue of the Super Spike Advisory, we provided an update on a stock that could potentially become one of the most important North American players in the trillion-dollar electric vehicle (EV) megatrend.
This is what you, too, should do regardless of how the rest of the year plays out. Revisit your holdings and add positions in companies that have long-term potential to deliver oversized gains.
We’ll continue monitoring this volatile market on your behalf. As bad as it looks right now, there’s no need to panic. After all, the future could turn out better than many investors expect.
Analyst, Casey Research