I’ve argued that there is a decent potential for a recession in the coming year. Here is a bullet point recession pattern from the most recent ValueTrend Update newsletter (click here to subscribe if you don’t already).
RISING RATES CREATE CONSUMER DISTRESS
- Consumer distress leads to less spending.
- Less spending by consumers means economic/ business contraction.
- Economic contraction leads to falling employment.
- Lower employment leads to recession.
Here is some current evidence behind the potential recession:
Retail is now starting to shut down locations in the USA (and Canada). In the USA, 800 Big Box Stores are closing locations.
“Bed Bath and Beyond leads the way with its intended goal of shuttering 480 locations. The next biggest hit comes from retailer Tuesday Morning, which is closing down 265 stores. Macy’s, Big Lots, JCPenny and Amazon are shutting down retail locations as well.” – BearTraps
So, lets assume that there is a decent potential for recession to begin this year. How does one profit in such an environment? One way is to focus on sectors and stocks that consumers can’t and/ or won’t do without. Basic needs, and not so basic needs (booze) suppliers maintain cash flow. Not so much discretionary goods.
Things in life you cant do without, even in a recession.
What we need: Food, water, waste disposal, essential services and products. That kind of thing. There’s things in life we WON’T do without, too. Addictive or semi-addictive products like alcohol, junk food, tobacco. (recall the COVID patterns). Stocks producing these “need/ won’t do without” products and services tend to be fairly recession proof. Lets look as some “need” and “won’t do without” stock sectors that might be good investments through such an economic potential.
The consumer staples sector wraps many of the “need” stocks and “wont do without” stocks into one basket. For example, the SPDR XLP ETF holds major positions in the stocks selling or making stuff you need such as basic good producers Mondelez and Proctor & Gamble – along with retailers of such goods Walmart & Costco. It also holds those addictive goodies like Philip Morris, Altria and Constellation Brands. Some people just gotta have a beer and butt. Finally, it holds a good share of sugary goodness makers such as Coca Cola and Hershey. Mmmmmm….chocolate!
Technically, staples are trapped in a box, which has been a good thing during the recent bear market. Ideally, one looks to buy the sector at the bottom of the range, or upon a breakout. Here’s the chart:
Garbage and waste
You need to put out the trash, no matter how bad it gets. The VanEck ETF holds the standards in the industry like Waste Connections and Waste Management, along with related firms focusing on water filtration and cleanup. Like the staples sector, you can see the box – another good place to hide during bear markets and recessions.
Gambling & gaming
Hey, when you’re broke from losing your job and need money, what better way to better your situation than to gamble at your local casino? Am I right? Well, some people seem to think so. I’d venture a guess that its the same people who view their beer & butts noted above under the staples category as “necessities”. Anyhow, the gaming sector is not without its volatility. But, as the chart below shows, it has its own rhythm. Note how, during the good old days of FAANG and tech exuberance of 2021, the gaming business went down. Suddenly, the bear enters in early 2022, the sector bases. As the bear became entrenched, gaming stocks took off in the second half of 2022. Go figure. Probably a sector to keep an eye on this year, I’ll bet!
There are several fast-food stocks out there, although no ETF that I could find focused strictly on the sector. YUM Brands, McDonalds, Starbucks, Dominos, Restaurant Brands Int’l, and Chipotle are all listed. I cant post all of the charts, so I thought I’d go to the king of the happy meal, McDonalds. The chart below illustrates a healthy trend with occasional flat spots (COVID period aside). That healthy stock trend was created by the rather unhealthy trend for many consumers to visit Mickey-Dee’s habitually. This, rather than as an occasional carb and cholesterol-laden treat. A personal friend owns a number of Dominos restaurants, and he relayed similar patterns. Consumers can feed a family cheaply on a pizza, and many of their clients are very, very regular in ordering pizza’s.
Investing in a recession
Demand for discretionary goods tend to fall as rates, inflation and job losses mount. My dad always told me the best strategy is to live conservatively during the good times, and save your money. Then, when a recession inevitably hits, you have the money, and can buy that sports car or luxury item you always dreamed of. And, at a cheaper price!
But some things are just too essential (perceived, or reality) to give up, even during a recession – noted above. Now is the time to focus on stocks and sectors that are recession resistant. I’ve presented a short list of such stock sectors above. Post a comment below if you have any recession resistant or benefitting stock ideas you’d like to share (SUBSCRIBERS, DO NOT HIT REPLY ON YOUR EMAIL–PLEASE POST ON THE WEBSITE).