Prepare Your Portfolio: Historical Odds of a Double-Dip Recession Hit 50%

If history repeats itself, as it's apt to do, the signs unhelpfully place the U.S. on either the cusp of a recession or a recovery.

This is according to CNBC who reports that the chance of the United States falling into a double-dip recession at nearly 50%.

That's because economies tend to work in self-reinforcing cycles. In good times, people spend, creating demand and jobs, which in turn leads to more spending, creating more jobs. Rainbows and butterflies.

But when things are bad, they only get worse. Unemployment decreases consumer power, leading to less demand, negating jobs, which further causes more unemployment, less spending, more saving. Doom and gloom.

Unfortunately, we're in the downward cycle now (as if you couldn't tell), and if measures aren't taken, then the country might find itself one step closer to the aptly named double-dip recession.

In the past 50 years, "every time that job growth has been as meager as it has been over the last four months, the economy has been headed toward recession, in a recession or in the immediate aftermath of one," said Joshua Shapiro of MFR in New York, who has diagnosed the economy more accurately than many other forecasters lately. (via CNBC)

"The chances that we are in something that is going to feel like a recession are close to 100 percent ... Whether we reach the technical definition" -- which is determined by a committee of academic economists and based on gross domestic product, employment and other factors -- "I think is probably close to 50-50."

Stagnant job growth in August hasn't helped measures, and CNBC reminds us that a stagnant job-growth rate -- meaning even if it doesn't go down -- in a growing population leads to a de facto higher unemployment rate.

While the statistics and countless "what ifs" don't paint a sunny picture of the near future, take heart in the fact that on the topic of the double-dip, even renowned analysts can't agree: 60%-75% of analysts don't actually think a double-dip recession is upon us.

James D. Hamilton, an economist at the University of California, San Diego, who has studied forecasting, reported to CNBC his belief that the economy would avoid a double-dip recession: "It's extremely hard to predict recessions," Mr. Hamilton said.

"Perhaps the best sign of how difficult it is to know the economy's direction is that, as a group, the nation's professional forecasters have failed to predict all the recessions since the 1970s, according to data kept by the Philadelphia Fed."

Either way, the economy will not turn around overnight. And whether you're an optimist or a cynic on the U.S. markets, you may be wondering how you can protect your portfolio from another downturn...

One way is to go back in time, and identify the companies that have outperformed the market during each of the market downturns over the last decade (i.e., between April 2000 - October 2002, and October 2007 - March 2009).

To further improve the quality of our list, we only focused on companies that have seen significant buying from institutional investors during the current quarter.

History suggests these dividend stocks are resilient during times of crisis, and big money managers seem to think there's more upside to be priced into these names. Is there any reason to expect it will be different this time around?

(Click here to access free, interactive tools to analyze these names.)

1.  Urban Outfitters (Nasdaq: URBN  ) : Operates lifestyle specialty retail stores under the Urban Outfitters, Anthropologie, Free People, Terrain, Leifsdottir, and BHLDN brands. The stock's price changed from 14.75 to 21.9 between April 2000 - October 2002, outperforming the S&P 500 index by 91.89%. The company also outperformed the index between October 2007 - March 2009, generating a price return of -25.31% (alpha vs. S&P 500 at 27.17%). Net institutional purchases in the current quarter at 8.1M shares, which represents about 7.51% of the company's float of 107.88M shares.

2. Walter Energy (NYSE: WLT  ) : Produces and exports metallurgical coal for the steel industry primarily in the United States. The stock's price changed from 7.75 to 12.2 between April 2000 - October 2002, outperforming the S&P 500 index by 100.84%. The company also outperformed the index between October 2007 - March 2009, generating a price return of -33.3% (alpha vs. S&P 500 at 19.19%). Net institutional purchases in the current quarter at 2.3M shares, which represents about 3.7% of the company's float of 62.09M shares.

3. Sanderson Farms (Nasdaq: SAFM  ) : Engages in the production, processing, marketing, and distribution of fresh, frozen, processed, and prepared chicken products. The stock's price changed from 8.13 to 15.93 between April 2000 - October 2002, outperforming the S&P 500 index by 139.36%. The company also outperformed the index between October 2007 - March 2009, generating a price return of -17.29% (alpha vs. S&P 500 at 35.19%). Net institutional purchases in the current quarter at 3.0M shares, which represents about 18.34% of the company's float of 16.36M shares.

4. Bio-Reference Laboratories (Nasdaq: BRLI  ) : Provides clinical laboratory testing services for the detection, diagnosis, evaluation, monitoring, and treatment of diseases primarily in the greater New York metropolitan area. The stock's price changed from 2.44 to 6.59 between April 2000 - October 2002, outperforming the S&P 500 index by 213.5%. The company also outperformed the index between October 2007 - March 2009, generating a price return of -30.98% (alpha vs. S&P 500 at 21.5%). Net institutional purchases in the current quarter at 1.1M shares, which represents about 4.45% of the company's float of 24.74M shares.

5. Vaalco Energy (NYSE: EGY  ) : Engages in the acquisition, exploration, development, and production of crude oil and natural gas. The stock's price changed from 0.25 to 1.18 between April 2000 - October 2002, outperforming the S&P 500 index by 415.42%. The company also outperformed the index between October 2007 - March 2009, generating a price return of 19.25% (alpha vs. S&P 500 at 71.73%). Net institutional purchases in the current quarter at 4.1M shares, which represents about 8.13% of the company's float of 50.41M shares.

6. Hawkins (Nasdaq: HWKN  ) : Distributes bulk and specialty chemicals in the United States. The stock's price changed from 8.31 to 8.5 between April 2000 - October 2002, outperforming the S&P 500 index by 45.71%. The company also outperformed the index between October 2007 - March 2009, generating a price return of -6.81% (alpha vs. S&P 500 at 45.68%). Net institutional purchases in the current quarter at 458.4K shares, which represents about 5.13% of the company's float of 8.93M shares.

7. Lannett Company (NYSE: LCI  ) : Develops, manufactures, packages, markets, and distributes generic pharmaceutical products sold under generic chemical names in the United States. The stock's price changed from 0.94 to 10 between April 2000 - October 2002, outperforming the S&P 500 index by 1007.25%. The company also outperformed the index between October 2007 - March 2009, generating a price return of 14.89% (alpha vs. S&P 500 at 67.38%). Net institutional purchases in the current quarter at 722.4K shares, which represents about 5.94% of the company's float of 12.17M shares.

8. Pennichuck (Nasdaq: PNNW  ) : Engages in the collection, storage, treatment, and distribution of potable water for domestic, industrial, commercial, and fire protection service markets primarily in New Hampshire. The stock's price changed from 22 to 28.25 between April 2000 - October 2002, outperforming the S&P 500 index by 71.83%. The company also outperformed the index between October 2007 - March 2009, generating a price return of -24.08% (alpha vs. S&P 500 at 28.4%). Net institutional purchases in the current quarter at 386.9K shares, which represents about 8.41% of the company's float of 4.60M shares.

List compiled by Eben Esterhuizen, CFA.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Becca Lipman and Eben Esterhuizen do not own any of the shares mentioned above. Institutional data sourced from Reuters, historical pricing data from Yahoo! Finance.

The Motley Fool owns shares of Bio-Reference Laboratories. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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