What a U.S. Recession Would Mean for Sectors, Foreign Stocks

Roger Nusbaum submits: A reader left a lengthy question asking for my opinion about the potential impact on various stock market sectors, and to a lesser extent world markets, if the US has a recession/depression/financial apocalypse.

This obviously has a lot of moving parts to it. A slowdown here should threaten industrial stocks and also threaten foreign countries that sell a lot of stuff to the US. Here I am thinking Japan and most of the southeast Asian countries.

There are some themes that could be compromised but, I believe, not ended. The first one that comes to mind is energy. Regardless of the velocity, demand for oil is growing at a faster rate than supply. An economic slowdown could hit the price of crude by some amount and also hit energy stocks. I think the prevailing theme will be demand in China, India, Pakistan and Vietnam (perhaps we should include Turkey). All of the countries will have booms and busts but we are a long way from demand peaking.

I also believe that some foreign markets are living in their own worlds (a phrase I have used before) and so are much less susceptible to the US -- here Turkey (not that it doesn't have plenty of issues) and Vietnam come to mind.

My thoughts about other sectors are not very revolutionary. Things like staples, health, utilities and telecom usually do well, and I don't think this time will be different but I have exposure to every sector so I don't have much riding on being wrong.

On CNBC Asia they devoted a lot of air time to water, as in there is not enough clean water. This is a theme I have been interested in (and writing about) for a while. Economic cycles won't alter demand for water, though they could of course hurt the stocks somewhat.

The reader expressed a belief that iShares Materials (IYM) is a good bet in here. Materials, as it ties in with my thoughts on energy, makes sense and I agree with what I think the reader is saying. I would offer some caution about IYM though (and XLB while we're at it). The materials ETFs are heavy in DuPont and Dow Chemical (client holding) and are more of a bet on chemicals than anything else. If one of these ETFs is your only materials sector exposure, you may not get the results you are looking for. Exposure to commodities is very thin and the ETFs, I think, miss out on the copper/nickel/zinc/iron ore mania that is going on.

I continue to favor (in no particular order) Norway, Sweden, Ireland, Canada, Australia, Vietnam and a couple of others that don't come to mind just now. These are all countries I have favored for a while. Turkey, I think, has a chance of being a much more important country, economically, than it is today. There are several big obstacles in the way of this -- so don't get too excited just yet.

It will also make sense (this should be obvious but deserves mentioning anyway) to have more allocated to cash than normal. Five percent for short term money is not bad and also the currency ETFs (for me anyway) also make sense with the prospect of having more cash than normal.

The way markets usually work, most of the growth comes from a couple of great years in a decade. I don't bet too much on my ability to guess when a great year will but lagging by 3-4% when the market is up 30% because you had a little too much cash is far from a death blow.