Buy Stocks -- but Cautiously

Buy, buy, buy! That's all I've heard recently as the market collapsed. I can't say I disagree, but I'd add one very important emphasis: Be super-selective in your stock picks.

True, when markets are wacky and down, it's generally a good time to buy stocks. If you bought in early 2009, you pretty much doubled your money two and half years later. While we're nowhere near that kind of crash, it's important to understand the difference, and to know why it's more crucial than ever to be selective in your stock picks right now.

Headed for another recession?
While we were headed out of a recession in 2009, we may be heading into one today. The second quarter's weak GDP number is only one of the many factors pointing in that direction.

Within the U.S., unemployment has remained stubbornly high. Meanwhile, an increasing number of corporations are announcing large job cuts, while fewer businesses create new jobs. Inflation -- especially for food and energy -- is creeping higher, stoking fears of stagflation.

The housing crisis remains far from over, as home prices continue to drop. Manufacturing growth remains slow and in some areas contracting; consumer confidence has hit a record low; productivity is falling, and labor costs rising.

Internationally, China's growth is slowing from a robust pace, which could affect its demand for other countries' goods. Eurozone sovereign debt problems remain unsolved, threatening another financial crisis, while Europe's economic growth is also losing steam.

Then there's the political situation in the United States, which partly drove the S&P's downgrade of the U.S.'s credit rating. Can Republicans and Democrats cooperate not only to bridge the gap over a deficit reduction plan, but also to solve the country's economic issues?

On top of all that, the U.S. has nearly depleted its arsenal of weapons with which to fight another economic slowdown. Fed chief Ben Bernanke could only say that the Fed would keep interest rates low until 2013. And with deficit reduction taking precedence in Washington's legislative agenda, President Obama almost certainly can't push another viable fiscal stimulus plan through Congress.

Will we sink into a second recession? I sincerely hope not, but the signs are there. Morgan Stanley and Goldman Sachs both just lowered their global growth forecast.

Resist the temptation
Investors could be pricing a recession into the market already -- but then again, shares could fall even further if things continue to get worse. We could be reliving the weakness of 2010, from which markets recovered nicely ... or we could face a much more serious slump this time.

Large drops in big names such as Bank of America (NYS: BAC) , J.C. Penney (NYS: JCP) , or Akamai Technologies (NAS: AKAM) can present tempting buy opportunities. But careful scrutiny is now paramount; other than their own internal problems, these companies have become exposed to myriad other risks.

Bank of America shares plunged after AIG (NYS: AIG) slapped the company with a $10 billion lawsuit for mortgage fraud dating back to the subprime crisis. B of A could further suffer from its exposure to banks in Europe. J.C. Penney has already had trouble lifting earnings, and the tough retail environment in which it competes could get hit even harder in another recession. Even Akamai's business, which has been plagued by increasing competition and commoditization of services, could be affected by a slowdown as business spending declines.

Be selective and careful
Personally, I wouldn't buy any of these companies -- but I'm not saying you shouldn't. Just be aware of their exposures to a possible second recession. Few companies ever prove completely immune to an economic slowdown, but some can be less volatile, and offer additional incentives to investors. At the moment, I'd seek out boring, safe stocks.

For example, BCE (NYS: BCE) , Canada's largest telco, has been one of my favorites lately. BCE is definitely not exciting, but it pays a handsome 5.4% dividend yield, and its generally low volatility offers some stability amid wild market swings. In the past few weeks, BCE has held up nicely.

Then there is Teva Pharmaceuticals (NAS: TEVA) , the largest generic-drug maker in the world. With Big Pharma's patent cliff looming ever closer, Teva should benefit. After quite a drop, its shares are also cheap now, and it has held up nicely during the last bear market. Teva also pays a 2% dividend yield.

Finally, there's the world's biggest fast-food chain, McDonald's (NYS: MCD) . Its cheap menu offerings, healthier options, and McCafe line of coffee drinks have helped the company prove itself during good and bad economic times alike. McDonald's isn't going anywhere, staying fairly stable through the past few weeks' wild ups and downs, and it's offering a 2.8% dividend yield to boot.

The market seems confused and uncertain to me, and its current weakness could continue for some time. I'd rather take less risk now, and buy stocks that I believe can withstand the heat.

The Motley Fool owns shares of Teva Pharmaceutical Industries, American International Group, and Bank of America.Motley Fool newsletter serviceshave recommended buying shares of McDonald's and Teva Pharmaceutical Industries. 

Fool contributorMelly Alazrakiregretfully owns shares of Bank of America. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

At the time this article was published

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