With inflation rampant and the Federal Reserve poised for what could be large interest-rate increases, the risk of recession has risen sharply.
“A hard landing [for the economy] has become our base case,” Wells Fargo analysts wrote in a commentary. “The recent pop in the two-year Treasury yield above 3% is our catalyst, indicating a more hawkish Fed and continued risk aversion.”
The two-year Treasury yield recently stood at 3.43%.
“We believe the recession starts in the markets since the economy has the highest equity beta in decades—i.e., the stock sell-off weighs on sentiment, then discretionary spending, and ultimately the economy,” the analysts said.
As for when stocks might recover, “we aren’t looking for a level, but rather an event (or events) to stabilize equities,” the analyst said. “Stocks likely will find a bottom when the market believes Fed hikes will begin to decelerate…. We believe this is still off in the distance.”
In the meantime, the analysts put together a “recession portfolio” consisting of the five lowest price-volatility stocks in each of the 11 S&P500 sectors.
Here are 10 of the choices:
· McDonald’s (MCD), the fast-food restaurant titan;
· Mondelez (MDLZ), the food company that makes Oreos;
· Chevron (CVX), the big oil producer;
· Berkshire Hathaway (BRK.B), the conglomerate run by Warren Buffett;
· Merck (MRK), the pharmaceutical giant;
· General Dynamics (GD), the aerospace company;
· International Business Machines (IBM), the technology icon;
· Dow (DOW), the chemical company;
· Welltower (WELL), a healthcare REIT; and
· Duke Energy (DUK), the utility stalwart.
Morningstar’s Take on McDonald’s
Morningstar analyst Sean Dunlop assigns the company a wide moat and puts fair value for the stock at $227. It recently traded at $239.
“As the leader in global food-service sales, McDonald's is taking adequate steps to adjust to an evolving competitive landscape, leveraging its scale to invest heavily in digital acuity and menu innovation and generate compelling unit economics,” he wrote in a commentary.
“While we expect an uneven return to normalcy due to varying paces of pandemic recovery globally, we're encouraged by management's vision for the business, which should enable McDonald's to maintain its edge.”
Morningstar’s Take on IBM
Morningstar analyst Julie Bhusal Sharma gives the company a narrow moat and puts fair value for the stock at $126. It recently traded at $136.
“IBM reported revenue of $14.2 billion in the first quarter, marking an 11% year-over-year increase in constant currency,” she wrote in a commentary. “Consulting had the strongest revenue, up 17%, … due to digital transformation demand.”
But she said difficulty hiring talent for IBM consulting competitors, “which we see as having higher-quality offerings, could be helping out IBM.” That’s because IBM’s peers' “unmet demand may be trickling down to IBM,” Sharma said.
The author of this story owns shares of McDonald’s, Berkshire Hathaway and Duke Energy.
