Meanwhile, credit card companies and banks are cutting back on lending. So the mixture of lost wealth, nervousness and tough lending standards will leave consumers saving more and spending less for an extended time, experts said. Businesses, too, will continue to cut back.
"It has become painfully clear that the ease of credit and liquidity it afforded provided the fuel for the financial, consumer and housing investing bubbles to develop over the past two decades," Merrill Lynch strategist Brian Belski said. "Consequently, supply in those areas now outstrips demand, and the necessary reduction in capacity will likely take several years to shrink."
Analysts such as Belski and Kostin emphasize investments in companies that make what people need regardless of economic conditions: consumer staples, such as toothpaste, and health care.
Experts say investors need to study companies in any sector for financial conditions that will allow them to weather a recession.
"Given the credit markets will likely remain tight for the foreseeable future, we believe those companies, industries and sectors that are able to self-fund themselves via high cash reserves and low leverage are best positioned going forward," Belski said.
Companies with financial strength and the ability to pay dividends are even better. And Kostin is advising investors to select large companies over small companies, and U.S. companies over Western European stocks.
Strategists are emphasizing care in bonds, too, suggesting high-quality general obligation municipal bonds and federally insured certificates of deposit, which typically pay higher interest rates than Treasury bonds.
High-yield bonds are paying tremendous yields, but the funds could incur large losses as bankruptcies increase.
