Stocks：What to Watch for in the Recession

 

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Don't be surprised to see a new wave of consolidation as stronger players snap up weaker ones

Eventually, the crisis will end. That has investors contemplating what a post-crisis stock market might look like.

Predictions of a serious economic downturn are everywhere, and not just for the U.S. but for the entire globe. If the credit crunch lasts long enough, it could be the first truly deep economic pullback in a generation or longer.

Asked about the future, many professional investors and fund managers say they're far too preoccupied with the current crisis to make any long-term bets. That's why they many refuse to buy stocks—the unprecedented global credit crunch has made solid predictions all but impossible.

"I'm going to wait until the dust settles," says William Rutherford, president of Rutherford Investment Management.

Glimpsing the Future
Still, investors will eventually have to picture what the new economic order will look like.

Arguably, a credit crunch or recession makes all of us losers. But even in a severe recession, some businesses survive and prosper—even if only on a relative basis, and even if they take years to muddle through.

"There's always going to be a winner out there," says Ryan Crane, chief investment officer at Stephens Investment Management Group.

Here are five trends that may emerge whenever the crisis finally ends:

1. The strong eat the weak.

In the financial sector, failing banks and brokerage houses have already been gobbled up by safer (if not exactly strong) rivals. Bank of America (BAC) bought up mortgage giant Countrywide Financial and Merrill Lynch (MER). JPMorgan Chase (JPM) absorbed Bear Stearns and Washington Mutual. Citigroup (C) and Wells Fargo (WFC) battled over buying Wachovia (WB).

If the economic downturn is bad enough, expect the same trend to hit other industries, as strong players either buy or take market share from companies in financial trouble.

2. Fast-growing companies might not get the funding they need.

The credit crunch is cutting off the financing that helps businesses grow and create new jobs, says Michele Gambera, chief economist at Ibbotson Associates, a unit of Morningstar (MORN). Companies can't float issues on the stock market or sell bonds—investors won't buy them. And they can't borrow from banks, which are too panicked to lend.

If those conditions persist, it means trouble for new growth companies. "Who is going to make the next Google (GOOG) if there is no money to borrow to build the next Google campus?" Gambera asks.