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Recession Risk Hits 7-Year High: 5 Secure Picks

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Fresh surveys from Bloomberg and The Wall Street Journal indicate that chances of a near-term recession are spiking. A confluence of factors, including the trade war with China, a tighter rate regime and December’s equity market sell-off have helped to elevate such concerns significantly. And the longest federal government shutdown in U.S. history hasn’t helped matters.

Economists think that the impasse could shave crucial points off this year’s GDP. Expectations of a recession in 2020 are even higher, and at the very least we could be in for a significant slowdown this year. This is why it is important to make your portfolio as recession proof as it can get.

Apart from consumer staples and utilities, discount retailers, low-cost airlines and healthcare providers are stocks, which could be relatively unaffected by recessionary conditions. Adding them to your portfolio make for a smart move at this point.

Odds of Recession Increase Exponentially

The latest monthly poll conducted by The Wall Street Journal estimates that there is a 25% chance of a recession occurring within the next 12 months. These are the highest odds since October 2011 and represent an exponential increase from 13% recorded last year.

The trade war with China, a spike in rates and December’s market sell-off are the primary reasons for heightened odds of a recession. In fact, the outlook for 2020 is even grimmer. There is a 56.6% chance of a recession next year, which features presidential elections, per economists.

A Bloomberg survey conducted over the past week revealed similar chances of a recession. Analysts who participated in the survey believe there is median 25% chance of a downturn in the next 12 months, higher than the 20% revealed by December’s survey.  

Slowdown in 2019, Recession in 2020?

The first recessionary fears, which surfaced last year, were sparked by prospects of a yield curve recession. Analysts at JPMorgan (JPM - Free Report) believe that declining yields, taken together with recent equity market losses and mounting low-grade debt levels, indicate that there is a 50% chance of a slowdown within a year.

Per Bloomberg’s survey, the median estimate for this year’s economic growth declined to 2.5% from the 2.9% recorded in 2018. This is likely because the impact of last year’s tax cuts have begun to fade. Meanwhile, China’s economy continues to struggle and central banks across the world. These factors have been cited by Societe Generale (SCGLY - Free Report) as reasons for a downturn in 2020.

Ultimately, even if a recession doesn’t occur this year, the odds of a near-term slowdown have increased significantly. While jobs data remains strong, PMI numbers have declined to a 15-month low. Additionally, manufacturer’s business confidence has plunged to a near two-year low.

Our Choices

Several surveys indicate that the chances of a near-term recession have increased significantly. Trade tensions, tighter rates and fears of an economic slowdown have contributed to such speculation. The effect of last year’s tax cuts, which provided substantial stimulus last year, have also started to fade.

This is why it is prudent to add stocks to your portfolio, including utilities and consumer staples, which can protect your profits from recessionary conditions. However, picking winning stocks may be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

Centene Corporation (CNC - Free Report) is a well-diversified, multi-national health care company that primarily provides a set of services to the government sponsored health care programs.

The recession-proof nature of health care stocks is well documented. Further, it is important to note that the industry expanded between 2008-12, which accounts for the Great Recession and early recovery. Total health care spending increased from 16.2% of GDP in 2007 to 17.6% in 2012.

Centene carries a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. The company has expected earnings growth of 19.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.8% over the last 30 days.

Archer Daniels Midland Company (ADM - Free Report) is one of the leading food processing companies in the world.

Archer Daniels carries a Zacks Rank #1 and has a VGM Score of B. The company has expected earnings growth of 1.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.2% over the last 30 days.

Spirit Airlines, Inc. (SAVE - Free Report) is an ultra low-cost carrier that went public in 2011. Airlines are rare additions to lists of recession proof stocks. But Spirit could prove to be the exception since customers facing a cash crunch could turn to cheaper alternatives during hard times.

Spirit Airlines has a VGM Score of B. The company’s expected earnings growth for the current year is 39.4%. The Zacks Consensus Estimate for the current year has improved by 11.2% over the last 30 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Pinnacle West Capital Corporation (PNW - Free Report) provides electricity services (wholesale or retail) in the state of Arizona through its subsidiaries.

Pinnacle West has a Zacks Rank #2 (Buy) and VGM Score of A. The company has expected earnings growth of 8.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.4% over the last 30 days.

Walmart Inc. (WMT - Free Report) experienced a 5.1% increase in profits during the early months of 2009. At this point, every other retailer was reporting losses. This is clear proof that discount retailers could actually prosper during a recession.

Walmart carries a Zacks Rank #2 and has a VGM Score of B. The company’s expected earnings growth for the current year is 9.3%. The Zacks Consensus Estimate for the current year has improved by 0.2% over the last 60 days.

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