If you ask me, the more people who think we will have a recession, the better. But more on that in a second.
Brokerage extraordinaire Goldman Sachs (NYSE: GS) now agrees with those who think recession is on the menu for 2008. Being able to shuck and jive through the turbulent credit markets doesn't mean the firm is omniscient, but let's assume it has a decent handle on what's going on.
Goldman's chief economist, Jan Hatzius, said earlier this week that the U.S. might be in a recession already, and if it's not, it will fall into one by this year's second quarter. He also said he expects the downturn to be modest and that growth will resume by the end of the year.
I notice two factors here. First, about interest rates: Hatzius suggested the weakening economy would force the Fed to act and bring down the federal funds rate another 1.75% from today's 4.25%. Yesterday, Fed chief Ben Bernanke stepped up to indicate that the Fed is prepared to cut rates as necessary to prop up the economy. Second, let's not forget that what Goldman says and what the government does may not be all that far apart. After all, Treasury Secretary Hank Paulson is a former CEO of Goldman.
What's important is that the more agreement we get on the reality of a recession, the better. While recessions are bad for companies, expectations of recessions are bad for stocks. The further we get from analysts projecting recession for the future and the more we plunge into actual recession, the faster we'll see stocks start to recover. Crazy, I know.
Along with the economic outlook, Goldman also updated its sector outlooks. It suggested overweighting health care, consumer staples, energy, and utilities and holding off on consumer discretionary, financials, industrials, materials, and tech.
In other words, stock up on Coca-Cola (NYSE: KO) and Merck (NYSE: MRK), and stay away from the likes of Merrill Lynch (NYSE: MER) and Target (NYSE: TGT). I'm sure they wouldn't suggest avoiding Goldman Sachs stock!
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