Many top economists, such as Harvard’s Larry Summers, say the economy is likely to enter a recession this year or next, thanks to the large interest-rate increases from the Federal Reserve.
The economy shrank 1.6% in the first quarter and 0.6% in the second. Consumer prices soared 8.2% in the 12 months through September, and the Fed has lifted interest rates by 3 percentage points since March.
Summers has noted that at any time in the past 60 years when inflation exceeded 4% and unemployment was under 5%, a recession has followed within two years. Unemployment matched a five-decade high of 3.5% in September.
It’s not just top economists who are worried about the possibility of a recession by the end of next year. A total of 69% of Americans feel the same way, according to a July survey by personal-finance website Bankrate.com.
In an ominous sign, more than 2 of every 5 (41%) Americans say they are unprepared to handle such an event. And of that cohort, 31% are doing nothing to prepare.
Forecast: Recession a Done Deal
Some experts say recession is a sure thing. A new Bloomberg Economics model projects a 100% probability of recession by October 2023. That compares with a 65% probability in Bloomberg’s prior forecast.
The increased probability arises as the economic and financial indicators that Bloomberg Economics considers have worsened.
The Bloomberg model goes further than outside experts. A Bloomberg survey of 42 economists puts the probability of a recession over the next 12 months at 60%, up from 50% in September.
Recession Stocks
Meanwhile, Morningstar investment specialist Susan Dziubinski offers some guidelines for choosing stocks that can withstand recessions.
“First, recession-proof companies typically provide goods and services that consumers will continue to pay for no matter what's going on in the economy,” she wrote in a commentary.
“For example, we're likely to continue to fill our prescriptions, enjoy our favorite beverages, and pay our electric bills, even in a recession. The health care, utilities, and consumer defensive sectors are considered recession-resistant.”
Recession-resistant companies are generally financially healthy and highly profitable, Dziubinski said. “They usually have competitive advantages that allow them to maintain reliable cash flows over time in any economic climate.”
Valuation is important, too, especially in light of the market’s recent volatility, she said. Morningstar analysts think many defensive stocks are now overpriced. But they see these three as undervalued. All were assigned a wide moat.
Anheuser-Busch InBev (BUD)
Morningstar analyst Philip Gorham puts fair value for the stock at $90. That's twice recent trading at $45.36.
Roche (RHHBY)
Morningstar analyst Karen Andersen puts fair value for the biopharmaceutical and diagnostic stock at $55, 38% above recent trades around $40.47.
Clorox (CLX)
Morningstar analyst Erin Lash puts fair value for the household-products icon's stock at $160. That's 23% above recent trading at near $130.
