U.S. Likely To Avoid Recession

Includes: GLD, SDRL, SPY
by: Disruptive Investor

A sharp global slowdown coupled with a recession in the eurozone raised concerns about a likely recession in the United States. It is however surprising and positive to witness the resilience shown by the U.S. economy amidst a global manufacturing recession. The services sector has held up pretty well and should ensure that the U.S. does not fall into recession in the near-term. This article looks into some of the positive economic indicators and the investment strategy for the next few months.

For a consumption driven economy, which has been showing resilience due to the services sector, the consumer confidence is an important indicator of the likely trend in economic activity. It is encouraging to see the consumer confidence index rising sharply in the last few months. If this trend remains intact, GDP growth will remain positive. Further, with festive season round the corner, it is likely that retail sales will get a boost with rising consumer confidence.

Continuing with the important aspect of consumption and retail sales, the real personal consumption expenditure has grown in the last few months and has been above the three-year average real personal consumption expenditure. I expect this trend to continue into the last three months of 2012.

At the same time, retail sales have also increased in the last three months after negative growth for three months on a trot. I would be concerned to some extent due to the impact of the hurricane Sandy. However, growth might still remain positive in the festive season.

My conviction on US avoiding recession is strengthened by the fact that the global manufacturing and services index has witnessed an uptrend after the composite index nearly indicating a global recession. If growth in China and India has indeed bottomed out, global economic activity might be relatively robust leading to a declining probability of recession.

My argument related to a declining probability of recession is also confirmed further by the probability of US recession predicted by the Treasury spread. The recession probability is on a decline as of October 2012.

I am certainly not suggesting that there are no more economic concerns in the foreseeable future. With the fiscal cliff issue gaining momentum, market participants will remain cautious on the recession debate as implementation of the fiscal restraint measures will certainly lead to a recession in 2013. However, I do believe that the fiscal cliff event will be resolved through postponed spending cuts plans. This will ensure that the economy witnesses more stability before the government can think of cutting on spending meaningfully.

Another factor for concern is the debt ceiling issue, which might come into focus in a month or two. I consider this important because consumer confidence slumped to a non-recessionary lowest when the debt ceiling issue was being debated last year. A similar decline in consumer confidence can impact consumption.

I have to mention here that the issues of fiscal cliff and debt ceiling will be resolved with a positive outcome for the economy and markets. However, it will only be after it has created some panic in the markets. The point I am trying to make here is that relatively good economic data might not lead to robust asset markets in the near-term. I am of the opinion that equity markets along with other risky asset classes will correct in the next 2-3 months due to the nervousness related to policy changes.

I would consider any such correction as a good opportunity to buy risky asset classes. Some investment options that can be considered on correction would be -

SPDR S&P 500 ETF (NYSEARCA:SPY) - It has been proven that beating the index is not an easy task. Therefore, the strategy should be simple -- beat the index or invest in the index. From this perspective, SPY looks interesting. The ETF provides investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index.

SPDR Gold Shares ETF (NYSEARCA:GLD) - I had discussed the probability of a correction in gold in one of my earlier articles. I maintain that view and investors can consider exposure to the hard asset on correction for the long-term. The GLD ETF seeks to replicate the performance, net of expenses, of the price of gold bullion. The ETF has an expense ratio of 0.4%, with net asset holdings for the fund at $65.26 billion.

Seadrill Limited (NYSE:SDRL): I had discussed the long-term prospects for Seadrill in one of my earlier articles. I like Seadrill as it caters to the oil and gas sector, which I am bullish on for the long term. Also, the company offers a high dividend yield. SDRL provides offshore drilling services to the oil and gas industry worldwide, is also an excellent long-term buy, in my opinion. The company has a diverse asset base of 24 drillships & semi-submersibles, 21 jack-up rigs and 21 tender rigs. Further, 18 newbuilds would serve as long-term revenue drivers once they come into operation in 2013 and 2014. SDRL currently has an order backlog of USD19.7 billion, which gives revenue visibility in the foreseeable future. Being the second largest ultra-deepwater player also serves as an advantage for SDRL in the long term. Investors can consider the gradual accumulation of this exceptionally high dividend yield (8.5%) stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.