How to Navigate a ‘Profit Recession’ in U.S. Stocks
April 15 — Merrill Lynch’s Chris Wolfe discusses the outlook for U.S. stocks and his investment strategy with Bloomberg’s Carol Massar on “Bloomberg Markets.”
- Inflation is soaring, rates are rising, stocks are down and there’s talk of recession.
- Despite that outlook, experts say there are still stocks worth buying that can earn you a return.
- Consider value stocks, dividends, and consumer staples.
The days of easy money are over – at least for the immediate future.
For much of the past decade, , investors could put money into the market and almost always watch their balances rise. And after two short months of recession in 2020, stocks resumed their uptrend, hitting record highs, until recently.
With the highest inflation rate in 40 years, interest rates rising, stock indexes plunging double digits, and economic uncertainty, it’s getting tougher to find a place to invest in stocks and earn a decent return.
But financial advisors say it’s still possible. The first piece of advice: when the economy changes, investors need to change with it.
“We encourage investors to embrace the realities of this new environment,” John Lynch, chief investment officer at Comerica Wealth Management, said.
With that mindset in place, here are tips to help you find the best stocks to invest in now.
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Without low-interest rates and low inflation to fuel growth and technology stocks, investors should start moving into value stocks, experts say.
Value stocks tend to get passed over by investors during bull markets for high-flying growth and technology shares, resulting in their becoming undervalued relative to their balance sheets, earnings growth, and cash flow.
But now that those high-fliers are in the dumps, investors should take another look at value stocks, experts said. During tumultuous times, they tend to be stable investments with long-term growth potential because the companies are usually mature with reliable earnings and sales growth and may even pay dividends.
When the market is topsy-turvy and capital gains are hard to come by, financial advisors say consider dividend-paying stocks. Not only do they tend to be less volatile than non-dividend-paying stocks, but they can provide you with some steady income during uncertain times.
Or if you reinvest the dividends, you’ll benefit from the power of compounding. Using your dividends to buy more shares that pay more dividends will grow your money exponentially.
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If you hold the stock long enough, dividends from most companies with stocks traded on major U.S. stock exchanges are often tax advantaged, too. In some instances, qualified dividends will be tax free, but they’ll always be taxed at a lower rate than ordinary income.
Dividends can also be used to hedge against inflation, especially if they are increasing regularly.
“Importantly, we target stocks with dividend increases that meet or exceed the inflation rate,” Daniel Milan, managing partner of Cornerstone Financial Service, said. “If your income is going up at around or above inflation, that’s a strong recipe for success.”
Devon Energy, which has consistently increased its dividend to $1.27 per share this month from $0.34 in June 2021, is a favorite as well as Blackstone which raised its dividend to $1.32 in April from $0.82 in the same month last year. Hershey also boosted its dividend to $0.901 in May from $0.804 a year earlier.
Buy what consumers need, not what they want
Another tip is to look at what consumers are buying and follow their lead, experts say. During challenging economic times, consumers shift their spending to everyday necessities and away from non-essentials.
“Health care and consumer staples, things people need to buy like food and household supplies, things that you would be buying regardless of the economic environment,” Mychal Campos, head of investing at financial services company Betterment, said. “Those sectors hold up in recessionary environments.”
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Other recession-proof investments include commodities and energy, which include companies like Chevron and Exxon, Campos said. Utilities are also another option that falls into this category but also pay dividends, he noted.
Another that might surprise you is Altria, Milan said. Altria makes and sells tobacco products and is categorized as a consumer staple company.
“It’s resistant to inflationary and recessionary pressures, I guess, because you can sell more bad stuff when people get stressed,” Milan said.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at email@example.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.