Recession talk spooking emotional investors

NEW YORK — "Get a neck brace," is what Ed Yardeni is telling his investment clients now. The market strategist says when shareholders get emotional, they tend to take stocks on wild rides.

That's just what has been playing out on Wall Street in recent days. Even the tiniest bit of news that investors think points to more economic weakness can send share prices plunging.

Case in point: AT&T's shares tumbled after its CEO mentioned "soften" and "consumer" in the same sentence, even though he made no changes to the company's earnings outlook. The market also slumped after Goldman Sachs forecast that the economy is heading into a recession, despite its view that an economic pullback could be short and mild.

Investors aren't looking at the incoming data objectively anymore. Recession worries are dominating their thinking, and they've taken to hunting for news — or sometimes just words — that can fit their gloomy view.

That's why this year has mostly started off on a sour note. There are reasons for investors to be worried. Falling housing prices have made it harder for homeowners to borrow against their properties, which no doubt is playing a role in the softness of consumer spending.

And that's spooking corporate America, with many companies already protectively holding back on hiring.

Increasing mortgage-default rates have caused lenders everywhere to tighten their borrowing standards for businesses and consumers. Citigroup chief U.S. equity strategist Tobias Levkovich thinks the Federal Reserve's February loan officers' survey could show banks tightening commercial- and industrial-loan growth by a net 30 percent since November.

Should such conditions result in a recession — which we won't know is happening until well after it has begun — it wouldn't bode well for stocks at least in the near term. Recessions on average last 216 days, or just over seven months, and stocks post an average 8.64 percent decline during the first half of the pullback, according to Citigroup data dating back to 1953.

Some investors seem intent on making such ugly prospects a reality, as has been evident by their overreaction to some news.

"Investors are twitching," said Yardeni, who runs his own investment firm. "They are making extremely emotional decisions, which means every bit of news is amplified."

Investor sentiment is suffering because of recession worries. The weekly survey by the American Association of Individual Investors found that nearly 59 percent of its respondents were bearish, the most since 1990, according to Bespoke Investment Group.

At first glance, that sounds dismal for stocks. When the AAII survey in the past has gone bearish above 55 percent, however, the S&P 500 has been higher one year later, Bespoke said.

While the first half of a recession can punish stocks, the second half tends to reward investors. During the nine recessions dating back to 1953, S&P 500 stocks have gained 13.17 percent on average in the latter half of a recession, according to Citigroup's Levkovich.

Investors might want to reconsider fleeing from stocks. Holding tight could be a daring move in these uncertain times, but one that has the potential to pay off.