What if No One Is Flying the Plane?
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of my favorite scenes in Indiana Jones and the Temple of Doom where the blond Missouri-bred song-bird (played by Steven Speilberg's future wife) drags a half-awake Indiana Jones to the cockpit, points to a pair of empty seats, and hollers at the top of her lungs:
"No one. Is flying. The plane!"
That's the scene that pops in my head when I hear the words: "fiscal cliff."
Yet there's a growing consensus that the U.S. won't go off the cliff. Intrade, arguably the world's most popular prediction market, puts the odds of a 2013 recession at 21.6%, roughly the same odds that a randomly selected U.S. Citizen will have a tattoo or suffer from mental illness.
But what if no one's flying the plane? Is there any way to preserve your capital and protect your portfolio from the potentially devastating effects of the fiscal cliff? As a matter of fact, there is: The National Association of Manufacturers (NAM) took up the subject in their report: Fiscal Shock: America's Economic Crisis.
While the 26-page report detailing the impact of rising taxes and sequestration over 87 different industry sectors is clearly meant to function as a warning siren for Congress, its an extremely handy guide for investors as well.
A Do Nothing Congress
Without action from Congress, NAM concludes that the fiscal cliff will result in:
- a cumulative 12.8% drop in GDP over the next 10 years
- 6 million jobs lost
- an unemployment rate of 11%
- a 10% drop in disposable consumer income by 2015
Large and durable contractions in consumer goods and defense-related industries.
Annual GDP Growth Rates, 2011/2012 (by %)
What industry sectors would suffer the MOST?
The industry sectors which stand to suffer the most over the next decade are the ones most closely aligned with consumer disposable income, defense spending, or public spending. Television and stereo systems, followed by fashion/clothing, automotives, publishing and dentistry.
Examples of likely Affected Mid-Large Cap stocks:
Multinational footwear, apparel and equipment maker Nike (NYSE: NKE). Nike is currently on a tear due to recent dividend hikes. It's also one of the top 10 retail global brands, and thus doubly exposed to sympathetic recessions overseas.
As the U.S. economy goes, so goes Nike [Nov. 30/07-Nov.30/09]
(Source: Google Finance)
Higher learning owner and operator Apollo Global Management (NYSE: APO) would also be exposed through its $2.5 billion acquisition of the education division of textbook publisher McGraw-Hill (NYSE: MHFI), a market leader in an industry that is allergic to state and local budget cuts.
According to the Center for Budget and Policy Priorities, 26% of state level tax receipts is spent on K-12 education. State and local tax receipts tend to both mirror and magnify the health of the broader economy, with sharper declines in recessions and slower gains during the recovery period.
As State and local tax receipts go, so goes McGraw-Hill [Nov. 30/07-Nov.30/09]
Both nominal and real State tax receipts were negative throughout the Great Recession.
State Nominal and Real Annual General Fund Spending Change
(Source: IMF)
Which industry sectors would suffer LEAST?
Gold, Energy, and Medical Instruments and Supplies companies would be either unaffected, or grow.
Likely Unaffected/Growth Large Cap stocks include:
Supermajor ExxonMobil (NYSE: XOM), which peaked at $94/per share in the bowels of the Great Recession. What makes oil recession-proof? While it's true that economic downturns tend to result in decreased gasoline consumption, they also tend to result in reduced OPEC quotas, while higher food imports increase social instability in the Middle East and North Africa. (Food imports are subsidized by oil profits in countries like Saudi Arabia, Jordan, Iraq, and Iran.
Foolish Takeaway
Is anyone flying the plane?
Whether the answer is Yes or No, I'd feel more comfortable with a parachute tucked into my overnight bag. (What if its a lousy pilot?) When it comes to global investment, it's better to have a Plan B than rely on the pilot of any one nation.
FatalX has no positions in the stocks mentioned above. The Motley Fool owns shares of The McGraw-Hill Companies, Nike, and ExxonMobil. Motley Fool newsletter services recommend Nike. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!
