An item in the financial news caught our eye the other day. Warren Buffett appears to be expecting a recession. How do we know that? He is rotating parts of his massive Berkshire Hathaway portfolio into consumer defensive stocks. At Top Gun Options we trade options. We are able to turn on a dime and change our trading strategies as needed. So, why are we interested in consumer stocks in a recession, what Warren Buffet is up to, or any of that? There are two things to consider here. One is the potential for options trading profits with stocks like McDonalds, Procter & Gamble, or Coca Cola as their share prices rise going into a recession. The other is in line with our DRINC approach to paying attention to what is going on in the world. Many times things that would not appear to be related to options trading are, in fact, key factors in how we end up trading.
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Why Pay Attention to Warren Buffett?
Buffett manages Berkshire Hathaway which has a market cap in excess of three quarters of a trillion dollars. His personal wealth is more than $100 billion and that is after giving away more than $50 billion over the last 17 years. The point is that he is a smart guy and has generally made profitable decisions over the years. At Top Gun Options we do not look to him for options trading advice. However it can be valuable to pay attention to what he is doing as he tends to be pretty accurate in predicting where the economy and the market are heading over the medium and longer terms.
Are We Heading for a Recession?
Ever since the Federal Reserve started jacking up interest rates Chairman Powell has been saying there will likely be economic pain (a recession) before they are done driving inflation down to the neighborhood of their 2% goal. All in all the Fed has done a reasonable job bringing down inflation without driving the economy into the dirt. However, over the years, as often as not, higher interest rates drive unemployment up and the economy down. Stocks head downward and don’t start back up until near the end of the recession. The trick for investors is timing all of this. The fact that Buffet is now rotating some of his huge portfolio into defensive consumer stocks gives one a hint about the timing needed. What we can infer from Buffett’s portfolio rotation is that he thinks the recession will still happen even though it has been delayed, and hopefully made less severe, by the Fed doing slow and steady rate increases instead of a Paul Volker-style huge single rate increase.
Trading Consumer Defensive Stocks
Consumer defensive stocks like P&G, Coca Cola, or McDonalds are generally not all that volatile. Thus, trading options on them usually requires a strategy that profits from sideways movement. However, going into a recession and coming out of a recession the stocks commonly go up on the way in and down on the way out. To the extent that an options trader can accurately predict this price movement they can profit from trading options on such stocks. If you are not certain about doing this, you would not be the first options trader who needs a bit of help in choosing and executing their trades. At times when the market is uncertain a good approach is to work with a dedicated trading squadron like one of those at Top Gun Options. With wise choices as to what to trade, risk hedging on every single trade, and professional trade execution Top Gun Options traders commonly profit in all markets whether the market is going into or coming out of a recession.
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Originally published at https://topgunoptions.com on August 31, 2023.
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