Latest data on inflation has upped the hopes of investors as market naysayers who had been warning of recession for several months are on the back foot now. Since inflation is still high and far above the Federal Reserve’s target, many still believe we can see a moderate recession in the coming months. But now there are many ifs and buts before such recession calls. For example, in June, talking to Bloomberg, Newedge Wealth's Cameron Dawson said that she expects a 350-point drop in the S&P 500 in the next six months. She said the recession expectations could be “realistic” if you “start to see the whites of the eyes of a recession showing up." But she also said that if earnings continue to show resiliency “then maybe that doesn't look like something that's in the cards."
Similarly, Tony Crescenzi, executive VP at investment management firm Pimco, said that he believes the US is already in a “growth recession.” Simply put, according to Crescenzi, growth recession is when the economy is not growing at its true potential and demand is lower than supply.
He believes the US has the potential for an annual growth of 1.8% but he believes currently the growth is below that. However, there’s a silver lining here. Crescenzi thinks this growth recession would give supply a chance to catchup with demand. When the gap between supply and demand will narrow, the Federal Reserve won’t need to keep increasing interest rates.
“The Fed could say we needn't raise interest rates any more, and if supply catches up enough, in a growth recession it can happen, then eventually there are interest-rate cuts,” Crescenzi said, in an interview with Bloomberg.
In its Q3 outlook report, American Century Investments said that it takes time for monetary policy actions to show their real effects. The report said that while the economy is still strong and unemployment is low, there are areas that are slowing as the firm said it believes “ a recession awaits us down the road.” American Century said that it isn’t alone in its skepticism of policymakers’ ability to control inflation without triggering a recession. The report quoted former Fed economist Claudia Sahm who said that a recession was expected for a long time but “we’re finally getting to the moment of truth.”
The report also quoted American Century’s interview with former Kansas City Fed President Esther George who thinks that while the Fed’s intention is obviously not to trigger a recession, in case we experience a recession, it would not be the first time rate hikes have triggered one.
American Century Investments also said that in light of expectations that inflation is here to stay, investors should protect their portfolios from inflation. And for that they should look for solid companies. Here’s what the report said:
“Against a recessionary backdrop, we think equity style distinctions are less important. We’re emphasizing quality instead. This means we’re focusing more on companies with stable revenues, repeatable profits, low indebtedness, stable cash flows and predictable business models less sensitive to economic conditions.”
However, the report does not paint all doom and gloom. It also said that in the second half of 2023 earnings are expected to remain strong amid lowering inventory of semiconductors and increasing economic activity in China and Asia.
The report further highlights that while the markets rallied earlier this year, there is a lot of optimism among investors that the Federal Reserve might start cutting rates down the road. American Century believes this is not a correct presumption. The report said that investors should continue to invest in businesses that are positioned to gain in the long term instead of focusing on short-term, assumption-based dynamics of the market.
Wells Fargo also published its mid-year outlook 2023 report in June. Wells Fargo said that the bear markets of 2022 and 2023 are expected to evolve into recession in the back half of 2023 or early 2024. Wells Fargo said that this would be the most predicted and longest anticipated recession. Wells Fargo said that economic cycles are natural and what’s important for investors is to position their portfolios accordingly.
“Our guidance — to remain defensive in portfolio positioning — has remained consistent through this period, and we reiterate that guidance in our 2023 Midyear Outlook.”
Wells Fargo also believes that after 2023 recession earnings will expand in 2024 and valuations will rebound. The bank said in its report that investors should prefer quality stocks, which have “sound balance sheets, strong levels of profitability and cash flow, the ability to generate consistent growth, and earnings stability.”
“As is typical, equity prices likely will increase at a much more rapid pace than earnings can recover, leading to price/earnings (P/E) multiple spikes and above-average valuations in 2024. However, once the earnings recovery catches up to the price recovery during the back half of next year, we expect multiples to revert to average levels. The following chart illustrates how our view of earnings and multiple expansion could combine to drive returns this year and next, and how this expected interplay relates to history. It shows calendar-year contributions to return for the S&P 500 Index from 2007 to 2022 as well as our forecasts for 2023 and 2024.”
Recession-Proof Stocks Billionaires Are Loading Up On
Our Methodology
Billionaires have also been anticipating a recession and it’s always interesting to see how they are positioning their portfolios according to market environment. For this article we first scanned and listed all stock holdings of the Vanguard Dividend Appreciation Index Fund (VIG), which is considered among the top defensive ETFs investors prefer during recessionary environments. For each stock holding of the ETF, we looked for the number of billionaires having stakes in them using Insider Monkey’s comprehensive data of billionaire-owned stocks. We then picked 10 of these stocks with the highest number of billionaire investors as of the end of the first quarter of 2023.
Recession-Proof Stocks Billionaires Are Loading Up On
With six decades of consistent dividend increases under its belt and long-term growth catalysts, Johnson & Johnson (NYSE:JNJ) remains one of the safest stocks to buy for both recession and normal market environments.
Morgan Stanley last month made some changes to its global dividend portfolio. However, Johnson & Johnson (NYSE:JNJ) continues to feature in the portfolio.
A total of 17 billionaire-led hedge funds were bullish on Johnson & Johnson (NYSE:JNJ) as of the end of the first quarter of 2023. Among these billionaires include Ray Dalio, DE Shaw, Donald Yacktman and Cliff Asness. Overall, out of the 943 hedge funds tracked by Insider Monkey, 86 hedge funds had stakes in Johnson & Johnson (NYSE:JNJ).
ClearBridge Large Cap Value Strategy made the following comment about Johnson & Johnson (NYSE:JNJ) in its first quarter 2023 investor letter:
“The tech-dominated quarter was a headwind for both defensive and cyclical sectors, with shares of health care holdings such as UnitedHealth Group (UNH), Elevance (ELV) and Johnson & Johnson (NYSE:JNJ) declining after a strong 2022.”
Colgate-Palmolive Company (NYSE:CL) has increased its dividend for over six decades now. It ranks 9th in our list of the best recession-proof stocks billionaires are loading up on. Insider Monkey’s database of billionaire-owned stocks shows that 18 billionaires were long Colgate-Palmolive Company (NYSE:CL) as of the end of the first quarter of 2023.
In May, Morgan Stanley reiterated an Overweight rating after Colgate-Palmolive Company (NYSE:CL)’s strong quarterly results and guidance. Morgan Stanley’s analyst Dara Mohsenian and his team believe there’s an upside to Colgate EPS, FX, organic sales, and gross margins in 2023.
Morgan Stanley also upped its price target on Colgate-Palmolive Company (NYSE:CL) shares to $89 from $82.
Among the notable billionaires having stakes in Colgate-Palmolive Company (NYSE:CL) include D. E. Shaw, Dan Loeb, Ray Dalio and Cliff Asness.
Third Point Management made the following comment about Colgate-Palmolive Company (NYSE:CL) in its Q1 2023 investor letter:
“Existing positions in LVMH, Disney and Microsoft gained while FIS, Bath & Body Works, and Colgate-Palmolive Company (NYSE:CL) posted losses after their management teams lowered 2023 guidance despite reporting solid quarterly results. FIS and Colgate have both since “beat and raised” this guidance, indicating that many management teams are adopting very conservative tones in this uncertain macro environment.”
Hardly any list of best defensive stocks for recessions is written without mentioning The Coca-Cola Company (NYSE:KO), which has upped its dividends consistently for six decades and which has several billionaire stakeholders. The most important of these billionaires is Warren Buffett, whose hedge fund owns a $25 billion stake in The Coca-Cola Company (NYSE:KO).
A total of 18 billionaires in Insider Monkey’s database had stakes in Apple Inc. (NASDAQ:AAPL) as of the end of the first quarter. The most prominent of them was of course Warren Buffett whose hedge fund had a whopping $151 billion stake in Apple Inc. (NASDAQ:AAPL).
Apple Inc. (NASDAQ:AAPL) investors rejoiced at the company’s surpassing of $3 trillion valuation in June. While Apple Inc. (NASDAQ:AAPL)’s valuation has fallen below the $3 trillion market as of July 13, analysts are highly bullish on the future prospects of Apple. Last month, Citi analyst Atif Malik said in a note that analysts were underestimating Apple Inc. (NASDAQ:AAPL)’s gross margin expansion. Malik said that Apple Inc. (NASDAQ:AAPL) was gaining market share from Android and benefitting from the blend of iPhone Pro and Pro Max models. Malik started covering Apple Inc. (NASDAQ:AAPL) with a Buy rating and a $240 price target.
Elevance Health, Inc. (NYSE:ELV) ranks 6th in our list of the best recession-proof stocks to buy according to billionaires. Because Elevance Health, Inc. (NYSE:ELV) is operating in a recession-proof industry and pays dividends, it saw an increased interest from investors earlier this year when recession risks surged. Insider Monkey’s database of 943 hedge funds shows that 81 hedge funds reported owning stakes in Elevance Health, Inc. (NYSE:ELV) as of the end of the first quarter, up from 75 funds in the previous quarter.
The biggest hedge fund stakeholder of Elevance Health, Inc. (NYSE:ELV) during this period was billionaire Andreas Halvorsen’s Viking Global which owns a $991 million stake in the company.
Madison Investors Fund made the following comment about Elevance Health, Inc. (NYSE:ELV) in its second quarter 2023 investor letter:
“We purchased Elevance Health, Inc. (NYSE:ELV) and trimmed Marsh & McLennan and Arch Capital. Elevance is the largest for-profit Blue Cross Blue Shield plan in the country, supporting the largest domestic membership base across the managed care industry. While national scale is important, local scale is critical as well, given the localized nature of healthcare delivery. Elevance scores well on both fronts, giving it strong bargaining power with providers, lower customer acquisition costs, deep population health data and analytics, and the ability to offer attractive health benefit packages. All this combines to create a formidable moat for its business.
