The recent inversion of the yield curve is sending out a warning signal about the global economy. Lingering trade tensions have unnerved investors, pushing investors toward government bonds and dragging the benchmark yield down.
With fears of an imminent recession, investors should ideally take refuge in recession-proof stocks that have a steady stream of customers, irrespective of market conditions.
Bond Market Shows Signs of a Slowdown
Benchmark U.S. Treasury yield recently tanked to its 20-month low and the yield curve between the 10-year note and three-month bills also inverted — a sign of impending recession. The 10-year Treasury note is now at around 2.26%, its lowest level since 2017, whereas the 3-month Treasury bills yielded 2.3%, and that’s above the 10-year rate.
So, what led to the inverted yield curve? As trade tensions spooked Wall Street, investors pulled money out of equities and opted for safe-haven government bonds, leading to decline in the 10-year Treasury yield. After all, bond yields tend to move opposite to prices.
China recently gave out signs of escalating the trade war with the United States, triggering fears of a prolonged dispute that can upset global economic growth and squeeze corporate profits. Beijing is ready to use rare-earth minerals including 17 chemical elements used in almost everything from mobile phones, computer memory chips and rechargeable batteries to military equipment.
Adding to worries, China’s Huawei Technologies is thinking of filing a lawsuit against the Trump administration in its latest effort to fight sanctions from Washington. The White House has added Huawei to its Entity List that includes companies that American firms can’t sell technology without obtaining a license from the U.S. government. Following this, chip bigwigs like Intel, Qualcomm Corp and Broadcom Inc, to name a few, have restricted supply of major software and hardware components to Huawei.
Kim Forrest, chief investment officer at Bokeh Capital Partners, summed up by saying that “earlier in the year we thought the U.S.-China agreement was close to being done, and now it looks more far away than ever and that is making investors worried.”
Don’t Shun Equities, Instead Buy Recession-Proof Stocks
Contrary to popular belief, there are stocks that do well during economic downturns. Prominent among them are defensive stocks. These stocks are generally non-cyclical, or companies whose business performance and sales are not highly correlated with activities in the larger market. Their products are in constant demand, irrespective of market volatility, and such names include companies from the utilities and consumer staples sectors.
Utilities are deemed defensive stocks as electricity, gas and water are essentials. Food companies are true defensive plays as demand for such staple stocks remains unaltered during market gyrations.
The idea of investing in “vice” stocks can also be considered. After all, products or services in this space are relatively inelastic, and business is recession-proof. The very nature of their business ensures a stable stream of consumers, irrespective of market conditions, which eventually leads to higher margins and solid profits.
Noteworthy vice stocks includes beer and gaming companies. Lest we forget, booze consumption is increasing at a slow but steady pace this year, according to data researcher Nielsen. And the rise in consumption is certainly a positive for alcohol stocks. Meanwhile, robust initiatives helped multi-jurisdictional gaming companies progress by leaps and bounds. But, let’s admit that things are looking up for such companies mostly due to improved consumer confidence.
Buy These 5 Recession-Proof Stocks Now
We have, thus, selected five stocks from the aforesaid areas that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Middlesex Water Company owns and operates regulated water utility and wastewater systems. It operates in two segments, Regulated and Non-Regulated. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has increased 5.9% over the past 60 days. The stock’s expected earnings growth rates for the current quarter and year are a solid 5.8% and 10.7%, respectively.
ONE Gas, Inc. operates as a regulated natural gas distribution utility company in the United States. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 0.9% over the past 60 days. The stock’s expected earnings growth rate for the current and next quarter are a promising 7.7% and 12.9%, respectively.
The Chefs' Warehouse, Inc. distributes specialty food products in the United States and Canada. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has climbed 6.2% over the past 60 days. The stock’s expected earnings growth rates for the current quarter and year are an encouraging 29.2% and 32.1%, respectively.
Davide Campari-Milano S.p.A. manufactures and trades in alcoholic and non-alcoholic beverages in the Americas. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 3.8% over the past 60 days. The company is expected to see earnings growth of 7.4% next year.
Las Vegas Sands Corp. develops, owns, and operates integrated resorts in Asia and the United States. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has risen 4.9% over the past 60 days. The stock’s expected earnings growth rate for the current and next quarter are a solid 8.1% and 6.5%, respectively.
In fact, Middlesex Water, ONE Gas, Chefs' Warehouse, Davide Campari-Milano and Las Vegas Sands have gained 11.2%, 8.4%, 4.5%, 15.7% and 8.9%, respectively, so far this year.