Hoping For The Best, Preparing For…

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You made it to Thursday!

The first two words of Twenty One Pilots’ “Saturday” were playing in our heads as we kept up with economic news these past few days. That’s right, it seems like “slow down” is the theme of the week, as the latest Consumer Price Index data shows that the pace of inflation slowed in November, with prices up 7.1% compared to a year ago. That might still sound like a lot, but it’s less than economists had predicted and far below the peak rate of 9.1% in June. And yesterday, the Federal Reserve announced an interest rate increase of half a percentage point, a welcome softening after four straight increases of .75%.

But any celebrations were short-lived. The Fed signaled rate increases will likely continue in 2023, albeit at a slower pace, and it will need more evidence of inflation cooling before it changes course. The Wall Street Journal reports that recession fears are at the forefront once again, with the threat of a looming economic slowdown sending stock prices lower in December, although bond prices finally started to climb after a year of dismal performance. BlackRock also rolled out the word “recession” multiple times in its 2023 Global Outlook released this week, declaring that we’ve entered a new regime of greater volatility that will require a new investment playbook.

With that in mind, in today’s newsletter we share our thoughts on three industries that experts think will thrive in an economic downturn and tips for finding the sustainable players in those markets. You may also find these four tips for investing in a recession helpful as you think about your strategies for the coming year.

News you can use

• The same energy that powers the sun could someday be put to work here on Earth! A major breakthrough in nuclear fusion science has brought us closer to a new source of clean power. Scientists at a US federal research facility in Livermore, California were able to produce more energy from fusion than is required by the laser that drives it. Nuclear fusion is considered a safer, cleaner alternative to the nuclear fission technology we use today. You can learn why this is such a big deal (yes, we really nerded out on this) and read more about general nuclear technology in our Guide to Cleantech Investing.
  
• A group of institutional investors announced the formation of Nature Action 100, a new global initiative to drive greater corporate action on tackling nature loss and biodiversity decline. Announced at the UN Biodiversity Conference (COP15), the initiative will identify 100 focus companies to be targeted for investor engagement and track their progress on reversing nature loss.
  
• The SEC voted in favor of small investors on Wednesday, advancing four proposals that aim to level the playing field with high-speed trading firms. If ultimately passed, the new rules would represent the biggest changes to US trading in nearly two decades, increasing competition on retail stock trades to give individual investors better prices. The proposals will be open for public comment until March 31.

Asking for a friend….

We know there is a lot to think about these days, and it can sometimes be a bit overwhelming. To help with those nagging questions and so you have useful resources at your fingertips, here are few links to resources and past stories relevant in these turbulent times:

• FWIW’s Guide to Long-Term Investing
• How to Practice Faith-Based Investing
• Some of our favorite inflation-fighting strategies (and a few more)
• Unpacking the ESG Alphabet Soup (including a link to our ever-growing glossary of common terms)

Ways to make your investing more recession-resilient

As hard as it is to believe, 2023 is only a little over two weeks away, and we’re ready for the “still processing 2020” memes to mark the occasion. The new year is a great time to meditate on renewal and personal growth, but economically speaking, things aren’t quite so optimistic.

Inflation is cooling but still near four-decade highs. The Fed is expected to continue hiking interest rates, making borrowing more expensive for both consumers and businesses. News of layoffs is becoming more common, and US CEO confidence is at its lowest level since the financial crisis of 2007-08 with 98% saying they are preparing for a recession in the coming months. Add to this geopolitical and pandemic unknowns, and investors are bound to be feeling bearish heading into January.

As we count down, the market’s attention is turned to companies promising strong, stable earnings and believed to be “recession-resistant.” These may be “defensive” stocks from companies whose products and services remain in demand despite macroturbulence and who can raise prices with inflation. Or they may be firms that offer other advantages, like a wide economic moat or government policy in their favor.

We’ve collected a few ideas to add some recession resilience to your portfolio. These aren’t investing recommendations but only examples that may help you as you do your research. (Other investing strategies for times like these include adding dividend stocks and inflation-linked bonds.)

Green drive

Some analysts see potential safe havens in the materials and products at the center of the renewable sector with climate change a priority for governments and consumers.

A fund manager at Foord Asset Management told CNBC that copper mining giant Freeport-McMoRan is a stock that “will work, kind of, in any type of economic environment.” He said, “If you believe in energy transition, in green energy, the world doesn’t have enough copper to get us there.” Mining is hardly the safest or cleanest industry, and some investors may want to avoid it, but there are companies making progress, and the need for these materials positions them solidly, even in the face of economic turbulence. Read more about investing in raw materials here.

Similarly, a Wells Fargo analyst predicts Enphase Energy’s growth “is essentially ‘recession proof’ with global ESG mandates driving secular demand for solar.”

The largest clean energy fund, the iShares Global Clean Energy ETF (ICLN), is up 14.15% in the last six months, and the Invesco Solar ETF (TAN) is up 18.61%. For comparison, the broader market (S&P 500 index) is up 3.69% over the same period.

Affordable food and treats

Even though people may cut their restaurant budgets during times of financial difficulties, they still reach for packaged foods like cans of soup, coffee, soda, candy, and snacks. Companies like Hershey and Campbell Soup Company actually raised their full-year earnings outlooks recently, and the First Trust Nasdaq Food & Beverage ETF (FTXG), which holds both, is up almost 10% in the last six months. Discount retailers that carry these essentials, like Walmart, Target, Dollar Tree, and Dollar General, are also seen as safe havens during downturns.

This resiliency is also seen in some reliable restaurant chains. According to data cited by Barron’s, “average same restaurant sales for more value-oriented fast food companies declined less than 2% in 2009, compared with a more than 7% decline for full-service restaurants.” McDonald’s stock reached an all-time high in November, and Chipotle shares have been turbocharged this year as it hiked prices and noticed “minimal resistance” from its customers.

Large food companies can have a big impact on the planet and society by choosing sustainable practices, and sustainable investors can look at those being responsible about emissions, sourcing, labor, animal welfare, packaging, reducing waste, marketing, etc. Many publish annual sustainability reports with progress and goals, and you can also find third-party studies, rankings, and ESG ratings.

One man’s trash

Companies in the utilities sector, like water management and electricity providers, aren’t very glamorous or interesting but are considered safe plays during recessions. The Utilities Select Sector SPDR Fund (XLU) is up around 8% in the last six months.

Waste management companies are critical no matter what’s happening and can play a big role in protecting the environment.

In October, Jefferies analyst Stephanie Moore told CNBC that waste companies outperformed the S&P 500 during nine of the last 11 market corrections and called Houston-based WM, the largest waste player in North America, “a defensive play to ride out the headwinds.” She added that the market is underestimating the company’s sustainability investments.

Lori Keith, director of research and portfolio manager at Parnassus Investments, told Fortune one of her best stock picks for 2023 is the second-largest waste management company in the US, Republic Services. Keith cited its large market share, recurring type revenue, and ability to increase prices in contracts as it deals with higher costs.

Of interest to sustainable investors may be the VanEck Environmental Services ETF (EVX), which tracks firms involved in waste collection, transfer and disposal services, recycling services, soil remediation, wastewater management, and environmental consulting services.

Other options

These are just a few areas in which you may find recession-resistant stocks. As no analyst we’ve talked to can guarantee a truly recession-proof solution, but they all stress the importance of diversification, here are some other industries and sectors experts usually mention: healthcare, automotive repair and home maintenance retailers, payment companies like Visa and Mastercard, and even beauty (ever heard of the so-called “lipstick index”?). Just remember that your values matter and only you can align your stock picks with the ideals you prioritize.

Before you go -

Relive 2022’s most amazing discoveries via National Geographic. From the James Webb Space Telescope’s inspiring pictures to the downright weird discovery that spiders can dream, this list reminds us how much knowledge the world has gained in the last 12 months. If you are a National Geographic Magazine subscriber, their 2022: Pictures Of The Year are jaw-dropping.

** FWIW team members own shares of Campbell Soup, Hershey, Mastercard, and Walmart.

Want to learn a bit more about the writers behind FWIW? Have an idea you would like us to cover in the future?