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As fears of a US recession loom, analysts have identified stocks including Pfizer [PFE], Kroger [KR] and NextEra Energy [NEE] as potential winners in difficult market conditions.
Credit Suisse analysts, led by strategist Patrick Palfrey, put together this list of stocks that have historically performed well during times of recession. More broadly, Palfrey expects consumer staples, healthcare and utilities companies to remain strong in a recessionary climate.
The Pfizer share price, after the success of its Covid-19 vaccine, had dropped 17% since the start of the year at the close on 21 April, while NextEra Energy has fallen 18% over the same period.
More recently, the stocks have been closing in on that loss. The Pfizer share price is up 7.3% since 1 March and the NextEra Energy is down just 1.6%.
Kroger is the only one of the trio to be up for the year, having risen 28.5% since 1 January. The majority of that growth has been since 1 March, as its share price rose from $46.80 to close at $58.18 on 21 April.
High inflation and rising interest rates tend to subdue growth stocks such as those in the tech sector. Russia's invasion of Ukraine is another dark cloud that is making value stocks appear more attractive to investors.
Stocks that tend to do well in recessions are in sectors where, despite the harsh financial times, spending will continue. In hard times, people still need to buy food, switch on the heating and access medical treatment. Therefore, stocks in the consumer staples, healthcare and utilities sectors tend to remain relatively stable and predictable. The largest companies in this space have also built significant competitive moats, and are therefore less vulnerable to competition.
Commodities like gold also tend to perform well as investors seek a safe haven.
Looking to previous recessionary times can provide a sense of how Credit Suisse's picks might perform. Between 31 December 2007 and 1 June 2009, NextEra Energy dropped 14% and Kroger was down 12%.
This may not sound great, but this was far better than the 37% decline experienced by the S&P 500 over the same period. Pfizer underperformed, however, with its share price dropping 38% in the period.
Concerns that the US is heading into economically turbulent times have accelerated this month because of changes in the yield curve.
The slope of the curve, which is used as a benchmark for other debt such as mortgage rates, provides an indication of future interest rate changes and economic activity. The yield curve is now inverted -- meaning short-term bonds have higher yields -- and this is generally considered a sign of recession.
At the end of March, the yields on the two-year Treasury note topped the benchmark 10-year note for the first time since September 2019. This trend has been associated with five of the past six recessions.
Other concerns include the strong employment market in the US, uncertainty over future Federal Reserve interest rate hikes, and low corporate and mortgage borrowing costs.
"The chance of a recession has been elevated by the Ukraine crisis, and the heightened pressure on businesses and consumers that will result from higher energy and food prices," Laith Khalaf, head of investment analysis at AJ Bell, says. "Central banks are expected to raise interest rates aggressively this year to deal with inflation, but tighter policy also puts the brakes on economic growth, which is probably one of the reasons the yield curve has inverted."
Tim Holland, chief investment officer at Orion Advisor, however, is sceptical over recession concerns. "The 10-year/2-year gap is but one part of the yield curve. Another important part of the curve, the 10-year/3-month, has steepened," he told Forbes. "If the past 30 years is any guide, both parts of the curve need to flatten and invert before we are at risk of recession."
If it does come, Khalaf believes the traditional assets that investors might normally turn to in order to protect their portfolios don't look particularly appealing right now.
"While cash rates look set to rise this year, they are still woefully behind the rate of inflation, which means cash savers will find their money's buying power going backwards. Gold might be one asset investors could turn to as are multi-asset funds," he states.
Alongside Pfizer, NextEra Energy and Kroger, Credit Suisse's line-up included other consumer goods companies such as Clorox [CLX] and Campbell Soup [CPB], healthcare firms like Danaher [DHR] and Becton Dickinson [BDX], and utilities firms Duke Energy [DUK] and Dominion Energy [D].
The Campbell Soup share price, for example, cooled 14% between 1 June 2021 and 10 March this year. However, despite higher inflation, it has since bounced back, rising 13%.
However, according to MarketWatch, Credit Suisse's full basket of recession stocks has dropped 4.6% year-to-date. In comparison, stocks in its expansion basket have climbed 3.3%.
Other stocks recently tipped by analysts and commentators to thrive in a recession include retailers Target [TGT] and Walmart [WMT] and defence group Lockheed Martin [LMT].
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