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Recession Fear Lurking: ETFs & Stocks to Play

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Though the U.S. economy has been on a strong footing, especially in the developed market pack, the bond market is spreading recession fear. Some key parts of the yield curve are inverted now. The 10-year Treasury yield slumped to a 19-month low as escalating trade tensions endangered U.S. economic growth. Investor sentiments are dampening.

The 10-year U.S. treasury yield is trading below that of the one-month, two-month, three-month, six-month and one-year for the last three days (as of May 28, 2019) (read: 10-Year Yield Below One-Year: Play Leveraged Bond ETFs).

Morgan Stanley analyst believes, “the U.S. economy is vulnerable to a more significant slowdown due to overheating last year from the fiscal stimulus. This led to labor cost pressures for corporations, excessive inventories, and an overzealous capex cycle that is now reverting to the mean, which means well below trend spending for several quarters.” However, another bulge bracket investment bank JPMorgan attaches the risk of recession to the U.S. economy at only 15%.

Some economists expect U.S. economic growth to slow to below 2% on an annual basis in the second quarter, after hitting a better-than-expected 3.2% in the first. A chart from the Cleveland Federal Reserve shows that the probability of a recession by December 2019 calculated from the Yield Curve now stands at around 25%. Chances are zooming to 31% by this time around next year.

So, clearly, the economy is likely to slow down and it’s time to tighten your belt. There are some slowdown-proof investment techniques that investors can follow in the coming days. We also highlight an ETF and a stock for each category.

Quality

Quality stocks are rich in characteristics like healthy balance sheet, high return on capital, low volatility, elevated margins, and a track of stable or rising sales and earnings growth.

iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report)

This fund provides exposure to large and mid-cap stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index.

Geo Group Inc. (GEO - Free Report)

It is an equity real estate investment trust. It specializes in the design, development, financing and operation of correctional, detention and community re-entry facilities. It has a Zacks Rank #1 (Strong Buy) and belongs to a top-ranked Zacks industry (top 34%). It has a VGM Score of A and saw 32% positive revisions in upcoming quarterly earnings estimate in the past four weeks.

Value

U.S. stocks are expected to be stable in the near term but choosing a value investment is a great idea at the current level given a myriad of tensions, including uncertainty regarding the trade war and global events like Brexit.

Vanguard Mid-Cap Value ETF (VOE - Free Report)

The underlying CRSP US Mid Cap Value Index provides a convenient way to match the performance of a diversified group of midsize value companies. Consumers, Financials, Industrials and Utilities are the top four sectors. It charges 7 bps in fees (read: Is 2019 a Year for Value ETFs?).  

Macro Bank Inc. (BMA - Free Report)

The Zacks Rank #1 Banco Macro Bansud is a leading bank in Argentina. With the most extensive private-sector branch network in the country, Banco Marco provides standard banking products and services to a nationwide customer base. The stock has a Value Score of A.

Defensive Sector: Utility

Low-beta sectors like utility is relatively protected from market tumult and is thus considered a defensive investment. Such a sector is recession-proof in nature (read: Forget Trade Fears, Invest in Defensive Sector ETFs).

Utilities Select Sector SPDR (XLU - Free Report)

This fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. The fund has high company specific concentration risks. It charges 13 bps in fees. The fund has a Zacks Rank #3 (Hold).

Middlesex Water Company (MSEX - Free Report)

The Zacks Rank #1 company treats, stores and distributes water for residential, commercial, industrial and fire prevention purposes. It comes from a top-ranked Zacks industry (top 18%) and top sector (top 50%).

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