Recession May Be Good News For Home Builder and Financial Stocks

As a fairly aggressive investor (at least with parts of our portfolio), I kind of like to see declining markets. I bought stocks when the market crashed in 2000. I bought stocks after 9/11. And these would be much more exciting news, except I didn’t have much money to invest in 2000 or 2001. My 563% return on Amazon through yesterday would be the stuff of fables. Except it involves the whopping total of 50 shares. With these riches, I may be able to afford five seconds of college for each of my kids.

Still, the recession talk and the recent market drops had me thinking about buying opportunities. I am, however, cognizant of my fairly novice-level skill when it comes to trying to time the market or pick individual stocks. You know, “Don’t catch a falling knife,” and all that. So I’ve been a bit wary.

But James Stewart’s column in SmartMoney has me a bit emboldened. He reports “stocks see their sharpest rallies just as recessions hit bottom”—and provides some data. The 1990 recession began in July. Stocks had their worst month in August, with more bad news in September and modest bad news in October. Stocks spiked in November—a 6% gain in the S&P 500 in one month! And they generally gained from then through April 1991.

If this pattern holds true for what many are saying is already a recession, there could be good news for stocks ahead. Was yesterday’s spike a blip or a sign of things to come? And if so, where are the opportunities? Stewart offers some suggestions:

Which stocks will benefit? The conventional wisdom is that the same sectors that led the downturn—home builders and related companies, financials and retail—will lead the rebound. And indeed, in 1990, after those same sectors had been hit hard, something similar happened.

Now the rub is that the past is not a predictor of the future. Stewart says he’s “not rushing to buy more”—but notes he bought quite a bit in January and February and feels “well positioned.” For the full read of Stewart’s column, see the April 2008 issue of SmartMoney. (At the time of this post, the column was not yet available online.)