The markets continue to charge higher.
Thursday’s gains came despite news that the U.S. economy grew at a weaker pace in the second quarter. Once again, we can point the finger at the Federal Reserve, which again failed to discuss asset tapering or raising interest rates.
Remember one thing.
The Federal Reserve will eventually taper its purchases of bonds and mortgage-backed securities. It will also have to take its foot off the gas at some point on interest rates.
While “normalization” – or the process of moving rates back toward 3% or 4% – could take years, we’re expecting two smaller interest rate hikes by 2023.
Such moves could hit growth stocks hard.
We could also see weaker economic growth due to higher borrowing costs. We might even slip into a recession. At least, that’s the chatter coming from some of the more bearish voices.
Former Federal Reserve Bank of New York President Bill Dudley recently penned an opinion piece in Bloomberg. He didn’t hold back any punches. “Unfortunately, the way the Fed is putting this long-term monetary policy framework into practice is likely to result in more volatile interest rates and more risk of recession,” he wrote.
In the event that they are right – that we do see weakness – we want to know the best defensive stocks to play. Today, I want to talk about three of our favorite “recession-proof” stocks that you can add to your watch list or start adding to your portfolio today.
Playing Defense in a World of Speculation
Before we dive into these three stocks, I want to clear up a misconception about the stock market.
Remember, the stock market is not the economy, and the economy is not the stock market. While one might occasionally lead the other – in many ways the tail wagging the dog – they are not as interconnected as everyone expects.
One of the things I hear often is the comparison between a bear market and a recession. These terms are mutually exclusive. A bear market is a stock market term referring to the downturn of an index or market that falls more than 20% from recent highs. It doesn’t matter what the time frame is. For example, we saw the fastest bear market ever in March 2020 when the Dow Jones fell by 20% in just 20 days.
A recession, meanwhile, is marked by two consecutive quarters where gross domestic product (GDP) is negative. That means that we get two consecutive negative readings over two 90-day periods.
Now, a bear market typically punishes the entire world of equities. But a recession doesn’t do the same. A recession will typically see investors transition their capital away from higher-risk growth stocks toward safer, higher-yield-generating picks like utilities, drug companies, or consumer staples companies that produce household products, like toilet paper.
The reason is that these companies tend to generate strong revenue regardless of the state of the economy. As I’ve noted over the last two weeks, energy utilities and pharmaceutical drug manufacturers can provide strong defense due to the underlying trends. Regardless of the economy’s state, Americans will require electricity. And aging populations will continue to drive demand for new drugs and medical procedures.
Let’s take a quick look at three companies that fall under these umbrellas.
Recession-Proof Stock No. 1: Procter & Gamble (PG)
Procter & Gamble is a Cincinnati-based company that has dozens of brands in the consumer staples space. The company operates in 36 nations and generated a stunning $70.95 billion in revenue in 2020. The company produces grooming, hair care, feminine, family care, and beauty products. It is also the company behind the toilet paper brand Charmin. This was the stock to own during the great toilet paper crisis at the height of the pandemic.
Procter & Gamble is currently in the Green Zone on TradeSmith Finance. This signals that we rate it a “buy.” However, it’s worth noting that PG’s momentum is in a side-trend. Investors will be happy to know that the company pays a reliable 2.5% dividend and has historically performed well in times of economic uncertainty. Americans will continue to buy toilet paper, shaving cream, and other household products in a recession, and PG offers broad exposure to this defensive space.
Recession-Proof Stock No. 2: Consolidated Edison (ED)
As I said, Americans have to keep the lights on. Consolidated Edison is a stock that weathered previous recessions well and kicked off strong dividends in the process. The New York-based utility company pays a solid 4.15% dividend and operates in a very profitable space. It is one of the biggest investor-owned energy utilities, which is important because that private ownership tends to do a better job at driving profits for investors.
The company has a very attractive operating margin of 21.3%. Its subsidiary Con Edison of New York alone provides electrical energy services to 3.3 million customers and gas service to more than 1 million households in New York City and Westchester County.
Again, you don’t need me to tell you that electricity is essential. But I will tell you that ED entered our Green Zone in May. The stock’s momentum has been in a side-trend for two weeks, but its strong dividend and reliable sector make it an attractive Watch List stock.
Recession-Proof Stock No. 3: Kroger Co. (KR)
There are a lot of people who might speculate on discount stores like Walmart (WMT) or Dollar Tree (DLTR). I am looking at grocery store chain Kroger Co. instead because it is a more reasonably valued stock than the alternatives and has a more attractive dividend.
Kroger is a supermarket chain based in Cincinnati. With a 2.06% dividend, the company has reliably returned cash to investors over the years. It recently hiked its dividend in June from $0.72 to $0.84. That’s a pretty significant jump. Even in times of recession, Americans will obviously continue to go to the grocery store. But I will say that the second-largest U.S. supermarket brand performed very well through the 2020 recession and 2008 great financial crisis.
Kroger is currently in our Green Zone (signaling that it is a Buy.) It is also in positive uptrend momentum, indicating that investors continue to pour money into the stock. Whether investors are getting more defensive or see the value in the company doesn’t matter. But if a recession hits, it will certainly pay to keep money in the grocery store sector with this play.
Conclusion
Remember, you can still own strong, defensive stocks in the event of an economic downturn. We might be far off from a possible downturn, but it’s always smart to have a strategy in mind. Look for defensive stocks with strong balance sheets, reliable dividends, and great products that people will purchase in any economic condition.
We’ll start digging into more earnings reports next week.
