If you have a reasonably diversified stock portfolio, it likely lost roughly 20 percent of its value during the first six months of the year. Those losses anticipate a recession—or at least a very rough patch for businesses.
There is little shelter in the stock market from recessions, but at the same time, they offer remarkable opportunities.
If you are worried about a deep and prolonged recession, consider stocks such as Merck, the pharmaceutical giant. Merck shares are actually up this year, and analysts see profits holding steady through 2023.
Another strong health care company to consider is AbbVie, whose products include Botox and Humira, the autoimmune injectable that was the top-selling drug last year after Pfizer’s COVID-19 vaccine. Humira’s primary patent will soon expire, and analysts foresee a decline in profits for AbbVie next year. Shares are up so far in 2022.
During a recession, dividends are especially important because they give you a cushion even if the stock price falls. Also, stocks like Merck and AbbVie, with reliable, high payouts, provide good competition for the bonds to which many investors flee in tough times. Merck’s yield tops that of a 10-year Treasury.
Fund investors can consider T. Rowe Price Dividend Growth (Symbol PRDGX), which invests primarily in firms with a track record of increasing quarterly payouts. The Price fund’s only drawback is that its portfolio is larded with stocks whose dividends may be growing but are tiny, including Apple. Vanguard High Dividend Yield (VYM), by contrast, is an exchange-traded fund that stresses elevated dividends paid by strong companies, including drug companies such as Johnson & Johnson and Bristol-Myers Squibb. The Vanguard fund is overweight with consumer staples stocks.
A good ETF in this sector is iShares U.S. Consumer Staples (IYK). The fund holds Mondelez International, whose brands include Oreo cookies and Tang breakfast drink.
Now for the opportunity. Technology has taken the hardest pre-recession hit. My theory is that these stocks are already priced for a serious recession and may bottom out before the rest. And they are modern versions of consumer-staples stocks.
Take Netflix. It’s down by more than two-thirds this year. Yes, the company has competition, but it is preeminent in a field that is unlikely to suffer—and might actually thrive as the going gets tough.
Amazon.com is the quintessential 2022 staples stock, yet it’s down nearly one-third this year. Amazon’s cloud-computing business would seem impervious to a recession as well.
Meta Platforms has declined by nearly half. It provides loads of free entertainment with Facebook and Instagram. With most of its revenues coming from advertising, it has more exposure to a recession, but analysts see sales growing 16 percent next year.
Will there be a recession? I have no idea. What is certain is that parts of the market are priced as if there will be a bad one. My recommendation is for investors to strive for a balance between traditional defensive stocks and exceptional growth companies that have taken a big hit.
(James K. Glassman is a contributing columnist at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.)
