Market commentary by eToro analyst for Romania, Bogdan Maioreanu
Markets have rallied but the risk of recession remains high in economies around the world. The United States is technically into a recession after two quarters of decreasing GDP but the labor market is showing strong signs of workplaces creation. Economists are debating if it is a recession or not while markets are rallying hoping for a slowing down of Fed rate increases.
A recession usually brings a decrease in consumption resulting in risks for the businesses like declines in sales and profits. This results in efforts to cut costs and usually the first way to cut costs is represented by layoffs but also cuts in capital spending – investments, marketing and research. Recession might curb credit access and slow collections creating a chain reaction that will eventually raise the number of bankruptcies.
For investors, navigating recession might prove to be tricky and while some investors focus on reducing losses others are actively seeking investment opportunities. For the latter category social investing network eToro reveals a basket of 15 US stocks that outperformed the market during previous downturns, but continue to do well during the upturns.
eToro’s ‘US recession basket’ outperformed the S&P 500 by 41% during the global financial crisis between 2007 and 2009 and by 5% during the shorter-lived Covid downturn. Just as impressive is its ‘all-weather’ performance – with the basket up 833% since 2007 through to the first half of 2022 versus ‘only’ 170% for the S&P 500 and 360% for the NASDAQ.
Losing less money is one thing; finding recession opportunities is another, but clearly, they exist. Many of the stocks we’ve picked have benefited in previous recessions from consumers trading down to cheaper products, saving money doing more of their own home and auto repairs, prioritizing ‘low cost’ luxuries – from eating out to toys – and maintaining critical spending on healthcare.
Well represented segments in the basket of stocks include discount and low-price retailers such as Walmart (WMT), Ross Stores (ROST) and Dollar Tree (DLTR), with McDonalds (MCD) also benefiting from consumers reducing spending and searching for cheaper alternatives. Similarly home DIY brands such as Home Depot (HD), Lowe’s (LOW) and auto repair parts stocks Autozone (AZO) and O’Reilly Automotive (ORLY) are included.
The basket also includes biotech companies with unique business proposals like Vertex Pharmaceuticals (VRTX) involved in scientific research and development of treating serious diseases, Amgen (AMGN) and Abbott Laboratories (ABT).
The portfolio includes a specialist in education 2U (TWOU) because in a recession, upgrading skills might separate you from the crowd. Hasbro (HAS) a company specialized in toys, games and entertainment and Hershey (HSY), a chocolate and sweets manufacturer are added to the list due to good performance overall and a strong consumer fanbase.
There is also H&R Block (HRB), a company specialized in accounting because, recession or not, Americans will have to calculate taxes.
Whilst past performance obviously can’t give us any promises for the future, looking at previous recessions and considering how consumers and businesses changed their purchasing behavior in response, can help investors to make more informed decisions and fare better during these downturns.
Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.
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