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When one of the world’s highest-profile investors speaks, the entire financial world listens. Last week, billionaire investor Sam Zell – who famously called the top of the U.S. real estate market just prior to the financial crisis and housing crash – said the U.S. economy would enter a recession within the next year.
According to Zell, while the U.S. economy itself is doing decently well, external forces will be the undoing of the current economic expansion. In an interconnected global economy, Zell claims, the negative forces swirling around the globe will eventually reach the U.S.
Is Zell right to say the U.S. is on the brink of recession, or is his call off base?
The Zell Recession
In the financial media, opinions are everywhere. It is easy to dismiss Zell’s remarks as just another investor calling for a downturn. But Zell is bringing up some very valid points in his assessment of the global economy.
For one, there are pockets of weakness across several industries. Industrials and consumer-oriented businesses are suffering from the effects of the rising U.S. dollar. Technology companies are getting hit hard by slowing economic growth in emerging markets like China. And that says nothing of the collapse in the oil and gas industry from falling commodity prices.
Many of these issues pertain to outside factors, but global economic concerns affect the U.S. as well. The appearance of negative interest rates, in Zell’s opinion, encapsulates the trouble the global economy finds itself in.
Add it all up, and it’s not hard to see the merit in the call for recession. Separately, Zell is also worth listening to because he has proven adept at market timing before. In 2007, Zell sold his company Equity Office Properties Trust for $39 billion, just before the housing market crashed. So it’s safe to say he probably knows a thing or two about overvalued markets.
But while Zell’s call makes sense for a number of reasons, don’t go selling all your stocks just yet.
The Case for Staying the Course
Zell makes a compelling case. The U.S. economy is clearly not out of the woods, as there are many challenging conditions lingering throughout the world.
However, U.S. economic data continues to look pretty good.
The U.S. unemployment rate is near 5%, which is the Federal Reserve’s measure of full employment. U.S. employers have been adding new jobs at a fairly brisk and steady pace over the past several years.
Furthermore, while lower commodity prices are a negative for U.S. corporations, they are a boon for U.S. consumers. Lower prices at the pump are putting billions of dollars back into consumers’ pockets. It’s true that they are mostly not spending those savings, preferring instead to increase savings and pay down debt, but those trends are very positive too.
While Zell makes a strong argument for why the U.S. economy is about to enter a recession, it’s generally not a good idea to base one’s investment decisions on what a single individual believes. To sell out of the market now based on the Zell recession call is essentially market timing, which investors are notoriously poor at.
Plus, it’s also worth noting that Zell has made similar ultra-bearish comments before. In a 2012 interview with CNBC, he made similar remarks that a steep economic downturn was in the offing. That prediction did not come to fruition – the U.S. economy has steadily grown since then, and anyone who sold their stocks based on that call has missed out on compelling returns.
If an investor truly expects a recession and is afraid of the potential damage to his portfolio, a more prudent course of action would possibly be to sell out of riskier sectors that would be highly exposed to a downturn – such as consumer discretionary or energy – and overweight the portfolio to more recession-resistant industries like utilities and telecoms. High-dividend, low-beta stocks like AT&T (NYSE: T) and Consolidated Edison (NYSE: ED) could be valuable additions to a defensive portfolio.
But for the most part, it’s probably better to simply stay the course.
How to Sleep Easy at Night
Is the economy keeping you up at night? Do you worry there’s another crash just around the corner? If so, you can stop worrying right now. All it takes is a few minutes.