More Signs of Economic Weakness

economy: With the stock market at all-time highs, the momentum has been built on the belief that an economic recovery is close at hand and the world will avoid a global recession. However, new data show that perhaps this belief might be too optimistic.

Markit Economics has just released the Purchasing Managers’ Indexes (PMIs) for many nations and economic zones around the world. Frankly, the data are quite bleak, showing that an economic recovery is certainly not occurring anytime soon, and that a global recession is becoming a distinct possibility.

For April, the U.S. Flash Manufacturing PMI (early reading) came in at 52, versus expectations of 53.8, and last month’s data point of 54.6. Just a reminder: a PMI number above 50 is a sign of growth; below 50 is a sign of contraction. (Source: “Markit Flash U.S. Manufacturing PMI,” Markit Economics web site, April 23, 2013.)

While the U.S. manufacturing PMI data still show expansion, the decline was significant, as was the degree by which it missed expectations. This April PMI reading for the U.S. was the lowest in six months, and is an indication that the economic recovery in the manufacturing sector is starting to slow.

The PMI composite for the entire eurozone was a very poor 46.5 in April, down slightly from expectations of 46.8. While the reading was unchanged from March, it is worrisome that there were no improvements at all. There is no current economic recovery in Europe; in fact, this reading indicates that economic activity has declined for 19 of the last 20 months.

Is a global recession very far away? Obviously, predicting the future is impossible. What we cando is look for trends. Many people already know that the economic recovery in the southern European nations has been poor. Yet many investors had been hoping that Germany would be able to kick-start an economic recovery.

Unfortunately, Germany’s manufacturing PMI came in at 47.9 in April, down from 49 in March, and below expectations of a reading of 49. This reading marks the first reduction in manufacturing activity for Germany in 2013.

It appears that the weakness internationally is now affecting relatively stable countries, such as Germany and the U.S.

The HSBC Flash Manufacturing PMI for China came in at 50.5, down from 51.6 in March, missing expectations of 51.4. This reading shows that the economic recovery within the Chinese economy is also faltering.

A global recession occurs when most of the major nations are declining in economic output. The current trend, as we’ve just seen from the manufacturing data provided by Markit Economics, is that there appears to be no strong economic recovery occurring at this point, which raises the possibility of a global recession.

What this means for American stock investors is that many sectors that were hoping to benefit from an economic recovery might see significant price declines. Commodities are already suffering from the lack of an economic recovery—for example, copper prices continue to sell off.

I would be quite cautious with any stocks that are economically sensitive. A global recession will mean a lack of ability to increase revenues. As we wait for further data to see if a global recession will ensue, much like any major sell-off, this period will provide excellent buying opportunities. This means that raising cash during this current uncertain environment is a prudent strategy.

Additionally, there are companies that offer the ability to differentiate their products through innovation, while paying an attractive dividend yield. One company that has already priced in weakness in its sector is Intel Corporation (NASDAQ:INTC).

Frankly, investors have already priced in a global recession when it comes to personal computer (PC) sales. At this point, I believe the discount is already factored in, yet the company is already developing new technology for the mobile phone sector.

If Intel is able to gain any traction in the mobile phone sector, this could be a strong generator of revenues, even if there is no economic recovery. Regardless of a global recession, people and companies still need technology to function in this day and age, and at some point after a stock is beaten down, it becomes a value proposition.

Plus, Intel issues a strong four-percent dividend yield, which is very attractive when compared to a 10-year U.S. Treasury at less than 1.8%. With the possibility of deflation becoming more imminent, as commodity prices drop and both the Producer Price Index (PPI) and the U.S. Consumer Price Index (CPI) are below optimal levels, such a strong dividend yield over the next decade will help cushion weakness until an economic recovery finally takes hold.

This article is brought to you courtesy of Sasha Cekerevac from Investment Contrarians.

Related: Dow Jones Industrial Average (INDEXDJX:.DJI), S&P 500 (INDEXSP:.INX).

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