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8 Great Recession-Proof Stocks That Are Perfect For Times Like These

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(Source: imgflip)

The economic devastation unleashed by the coronavirus pandemic has been historic, and the bad news is likely to keep getting worst for the next few weeks.

The good news is that we know how to beat this virus. The bad news is that takes time as well as severe containment measures such as the US and other countries are pursuing via closing down much of their economies.


US cases are not expected to peak until mid-April, based on the consensus of leading experts (such as the University of Washington) using the current new case data.

Economic forecasts have become increasingly bearish, including –34% GDP growth in Q2 (followed by +19% in Q3) from Goldman Sachs, and up to -50% from the St. Louis Fed.

In fact, the St. Louis Fed just put out a note explaining how unemployment (mostly furloughed workers, not permanent job losses) could peak at 32% and possibly even go as high as 40%.

On Thursday the Department of Labor reported 6.65 million new jobless claims, eight times the pre-pandemic record of 695K set in October 1958 and 10 times as bad as we saw in the Financial Crisis.

That means that in the last two weeks 10 million Americans have temporarily lost their jobs (some portion of those are permanent). For context, we’ve now seen 15% more job losses in two weeks than occurred during the two years of the Great Recession.

Lyn Alden Schwartzer has published a great article explaining why this is NOT likely to be the start of the next Great Depression, despite unemployment likely rising to levels rivaling or surpassing levels seen in 1933.

The basic summary is that the world is very different today than it was in 1929.

  • Congress cut federal spending 25% during the Depression (balancing the budget was supposed to instill confidence)
  • Today $2.3 trillion in stimulus is coming (more will likely follow if needed)
  • $4+ trillion in monetary stimulus is coming
  • Globally $11 trillion (and counting) stimulus is coming (12% of global GDP)
  • The Fed was cutting the money supply during the Depression (a stronger US dollar was supposed to instill confidence)
  • FDIC insurance didn’t exist, when banks failed millions of Americans lost their life savings
  • This time the Fed has promised infinite bond-buying across seven emergency measures to prevent credit markets from freezing up
  • The CARE Act provides small businesses (500 employees or less) forgivable loans covering 2.5 months of payroll and fixed expenses to not lay off workers
  • Secretary of the Treasury Mnuchin has promised that if that $350 billion runs out he’ll go to Congress to get as much additional funds as necessary

But given the firehose of bad news investors are understandably terrified and don’t know what to do.

Goldman’s base case is for stocks to fall 41%, but warns that a 50% decline is possible (due to 2020 earnings declining 33%).

JPMorgan’s quants think the bottom is likely in for the hardest-hit sectors and industries already, so it’s time to start buying the highest quality names.

Bond king Jeffrey Gundlach says April is going to be a repeat of March’s grisly declines, courtesy of the worst economic data in history.

Goldman, JPMorgan, and Gundlach have access to some of the best quants in the world, economic/market models running on supercomputers, and are looking at the same data.

They can’t agree on what’s likely to happen, because the pandemic that’s driving the recession and severe earnings contraction is far from predictable.

Each week the University of Massachusetts Amherst conducts a survey of the leading minds in business, healthcare, and epidemiology about how they think the pandemic will turn out.

You can see the even for the brightest minds in the country, the error bars are very wide, and the same is true when it comes to the economic and earnings implications from this pandemic.

Only fools, liars, gamblers or salesperson speaks in certainties when it comes to finance.

(Source: imgflip)

Prudent investors understand that the languages of Wall Street are

  • probability
  • risk management
  • margins of safety

Here are the lastest earnings consensus estimates from IBES/Refinitiv/Lipper Financial:

  • 2019 actual results: $162.93
  • 2020 consensus EPS: $156.88 (-4.3%, FactSet estimates -4.5%, Goldman Sachs -33%)
  • 2021 EPS: $182.22 (+16.1%, Goldman Sachs estimates +55%)
  • 2022: $200.12 (+9.9%)

As you can see, the earnings ramifications of the pandemic are expected to be severe, especially in Q2 2020 (Goldman estimates -123% EPS growth vs FactSet consensus -15%).

The good news is that earnings are expected to rebound relatively quickly, along with the economy (Goldman estimates -34% GDP growth in Q2, +19% in Q3, and +27% EPS growth in Q3).

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But as the fastest bear market in history has taught us, in today’s highly uncertain pandemic world, even a week can feel like a decade, and a month can feel like a century.

Getting through the worst quarter in history (economically speaking) to make it through to the strong expected recovery in Q3 and beyond, is going to take

  • an iron will
  • discipline
  • calm
  • a bunker-like sleep well at night or SWAN portfolio

Which brings us to the best recession-proof stocks you can buy during this unprecedented economic crisis, that you have probably not considered but definitely should right now.

The Only Recession-Proof Stocks Aren’t Equities At All…But Bond Funds

Bonds have always acted as a shock absorber to stock market declines… Bonds can provide dry powder to rebalance into the stock market or pay for current expenses when the stock market inevitably goes through a nasty downturn. Bonds keep you in business even if they don’t provide high returns as they have in the past.” – Ben Carlson (emphasis added)

A lot of people misunderstand what I mean when I talk about “safe” stocks to buy during this recession.

  • “safe” = fundamental quality, specifically pertaining to dividend safety
  • “safe” does NOT equal “won’t fall in a bear market”

Since 1945 in 92% of years when stocks fell bonds were stable or went up.

Bonds are a “risk-free” asset because unless the US government collapses, the bond investors will never lose their principle (Fed can monetize the debt by buying bonds to ensure this).

Like any asset, bonds can go up and down. But as Ben Carlson points out, a bad year for bonds is a bad day for stocks.

(Source: Ben Carlson)

Blue Chip Stocks Vs Bonds On March 16th, 3rd Worst Day In Market History

(Source: Ycharts)

There is no denying the safety of the dividend aristocrats as a group, nor their penchant for beating the market over time.

For the long-term investor, a diversified aristocrat portfolio is definitely “safe”. Yet Aristocrats fell 10% on March 16th, outperforming the S&P 500 by falling just 10% instead of 12%.

Realty Income (O) and Lowe’s (LOW) are 11/11 quality Super SWAN aristocrats (LOW is also a dividend king). Each fell 25% on March 16th.

Is any stock “risk-free”? Nope, not at all just low, medium or high risk, which is why no dividend stock is a true bond alternative.

The only true SWAN portfolio is one that’s diversified and prudently risk-managed for your particular needs/temperament.

These are the risk-management I now use to manage all my portfolios, including my retirement portfolio.

So let me show you why eight stocks, in particular, are truly recession-proof and can help you build a bunker retirement portfolio that can stand up to virtually any recession, including what Bank of America calls “the deepest recession on record.

Great Bond Funds To Consider When Building A SWAN Portfolio

It’s important to remember the difference between cash alternatives (t-bills) and longer duration bonds.

  • short-duration = limited interest rate sensitivity = less volatile (less hedging power)
  • longer duration = more price appreciation in a recession most of the time

You want to own a diversified portfolio of bills/bonds to serve two needs.

(Source: Research Affiliates, Duke University)

Duke University found that long bonds are the best passive hedging strategy.

  • appreciate as much as puts or credit default swaps in historical recessions.
  • appreciate six times more than gold
  • generate the greatest positive total returns across the entire economic cycle

So why not just be 100% in long-bonds for your cash/bond allocation needs?

Because of the same reason that bonds and stocks fall together 8% of the time since 1945.

During liquidity crunches, as has occurred during this recession, institutions have been forced to sell all liquid assets at times. Gold, bonds, stocks, when the run on cash is at a fever pitch, only true cash alternatives are safe.

(Source: Ycharts)

Intermediate bonds like 10 year US Treasuries are what the Fed is mostly buying during its QE infinity campaign, though it’s now buying bonds across the duration spectrum including 30-year bonds.

But you can’t beat ultra-short-duration treasuries for their ability to stay dead flat in virtually all conditions.

Here are the best cash equivalents I know of, 100% US treasury ETFs that have proven themselves a great store of value in this recession.

  • SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL): 0.7 duration (low rate sensitivity) – 1 star, neutral rating from Morningstar
  • Goldman Sachs Treasury Access 0-1 year ETF (GBIL): 0.7 duration, 2 star, negative rating from Morningstar
  • Schwab Strategic Trust – Schwab Short-Term U.S. Treasury ETF (SCHO): 2.1 duration (stronger recession hedge) – 3 star, silver rating from Morningstar
  • Vanguard Short-Term Treasury ETF (VGSH): 2.1 duration (stronger recession hedge) -3 star, silver rating from Morningstar
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VGSH is what I personally use for my cash equivalent needs now that I have money back into my retirement portfolio.

It’s also what the Dividend Kings Phoenix portfolio is using as our store of value.

Intermediate bonds are a good way to balance hedging power and interest rate sensitivity.

  • Fidelity SAI US Treasury Bd Idx (FUTBX): 6.8 duration (moderate hedging power) – 5 star, neutral rating from Morningstar

  • JPMorgan Government Bond A (OGGAX): 4.5 duration (modest heading power, lower rate sensitivity) 5-star neutral rating from Morningstar

And long bonds are what you can most rely on in a recession to appreciate when interest rates are falling.

SPTL and VGSH are what I’m personally using because in my retirement portfolio and DK model portfolios.

They have a weighted duration of 8 and thus serve as a reasonable cash equivalent/hedge while I steadily buy the highest quality companies off the Dividend Kings’ Phoenix Watchlist during this recession (more on this in future articles).

But right now I want to show you the power of bonds to help you sleep well at night, or merely to allow you to profit from the market carnage that’s all around us.

  • Vanguard Dividend Appreciation ETF (VIG): 100% 10+ year dividend growth stocks, 5-star, gold rating from Morningstar

VIG is a good proxy for quality dividend growth stocks.

VIG Since 2007

(Source: Portfolio Visualizer)

VIG has delivered superior returns with slightly less volatility, showing the power of quality dividend growth stocks.

7 Proven Ways To Compound Your Wealth Over Time

(Source: Ploutos) data as of March 31st

That’s not surprising given that both strategies are proven ways of outperforming the broader market over time.

Of course, the only reason that any strategy works over the long-term is that it doesn’t work all the time.

This is where diversification and asset allocation come in.

A diversified and prudently-risk managed portfolio allows you to ride out periods of high volatility and underperformance without losing sleep or discipline.

It also keeps you rational and calm when the markets dive, thus preventing panic selling and permanent and unnecessary losses.

VIG Peak Declines Since 2007

(Source: Portfolio Visualizer)

VIG owns some of the highest-quality dividend stocks on earth. It outperformed the broader market by 20% during the Great Recession.

VIG Top 25 Holdings

(Source: Morningstar)

VIG owns a whose who of aristocrats, kings and Super SWANs, including 11 Phoenix watchlist names.

Yet it still fell 40% during the Great Recession and suffered three corrections since then.

Now take a look at what happens if we use a reasonable allocation of bonds/cash to provide ourselves a stable store of value/recession hedge while investing in dividend stocks.

(Source: Portfolio Visualizer)

Note that I chose the bond ETFs/funds in this portfolio in order to allow for the longest possible backtest, January 2008, which includes the Great Recession.

All of these bond/cash equivalent funds are reasonably good substitutes for each other and basically do the same thing.

The duration of the 30% equally weighted bond portion of this 70/30 stock/bond balanced portfolio is a reasonable 7.4, representing moderate interest rate sensitivity in good times, and modest hedging power in recessions.

But take a look at how adding this 30% bond allocation turns a diversified portfolio of quality dividend stocks into a true SWAN portfolio for even the harshest economic times (the Financial Crisis).

Balanced Dividend Growth Portfolio Since 2008 (Annual Rebalancing)

(Source: Portfolio Visualizer)

A well-diversified and prudently risk-managed portfolio like this would have outperformed a more bond heavy 60/40 standard balanced portfolio with

  • 14% better annual returns
  • 6% less annual volatility
  • 15% smaller peak decline in the Great Recession
  • 23% better reward/risk ratio (excess total returns/negative volatility)

Balanced Dividend Growth Portfolio Peak Declines Since 2008 (Annual Rebalancing)

(Source: Portfolio Visualizer)

During the Great Recession, this balanced dividend growth portfolio fell half as much as the S&P 500, and 15% less than the standard 60/40 balanced portfolio, despite being 10% more allocated to stocks.

The power of top quality companies + a reasonable bond allocation = a true SWAN portfolio, even for severe recessions such as this one.

What if a 30% bond allocation isn’t enough for you? What if your risk profile is more conservative?

Here’s how to build a diversified and risk-managed 50/50 stock/bond portfolio that’s even less volatile but can deliver good long-term income growth and total returns.

(Source: Portfolio Visualizer)

Conservative Balanced Dividend Growth Portfolio Since 2008 (Annual Rebalancing)

(Source: Portfolio Visualizer)

Remember that the standard balanced portfolio is 60% stocks, 40% bonds, and this one is extra conservative, with 50% bond allocation. Yet it still managed to deliver

  • 5% better annual total returns
  • 46% lower declines in the Great Recession
  • 57% better reward/risk ratio
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Conservative Balanced Dividend Growth Portfolio Peak Declines Since 2008 (Annual Rebalancing)

(Source: Portfolio Visualizer)

This conservative balanced dividend growth portfolio suffered a peak decline about 1/3 as bad as the S&P 500, and 45% less than a standard 60/40 balanced portfolio during the Great Recession. Since 2008 it hasn’t suffered a single correction.

THIS is what I am talking about when I say all of my recommendations should be part of a well-diversified and prudently risk-managed portfolio.

When facing severe economic/market uncertainty in the short-term, having a bunker SWAN portfolio complete with cash/bonds (the only true recession-proof assets) is how you are able to stay calm, rational and avoid costly panic selling during dark times like these.

Bottom Line: Good Times Will Come Again, You Just Have To Ensure Your Portfolio Can Last Out The Short-Term Pain

Not even Warren Buffett can time the market. In Mid-October 2008, Buffett wrote a WSJ op-ed telling investors

The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary. So … I’ve been buying American stocks.” – Warren Buffett (emphasis added)

Stock were down about 40% at that time and would go on to fall 30% more before bottoming at -57%.

(Source: Ben Carlson)

Bear market rallies are common and frequent, as you can see in the example of the 2000 tech crash.

Anyone who actually sits in 100% cash (or bonds) and gets in at the precise bottom is the equivalent of a lottery ticket winner.

Prudent long-term investors don’t have to pray for luck, we can make our own.

(Source: AZ quotes)

Because while bear markets are incredibly painful in the short-term, they also are inevitably followed by what Ritholtz Wealth Management’s Ben Carlson calls “face-ripping rallies” after they do bottom.

(Source: Ben Carlson)

This is why market timing is so hard it’s not worth trying. Since 1932, the average 3-month post bear market low rally has been 25%, and the average 6-month rally 30%.

How can you tell when a 25% rally is a true bull market beginning or a mere “dead cat bounce”? You can’t. This is why the prudent long-term investor doesn’t try to go “all in at the bottom” because no one rings a bell at the bottom.

When the long-term odds are so in your favor, you don’t have to speculate and rely on market timing. Instead, you can and should rely on proper portfolio construction and risk management to

  • minimize the chances of becoming a forced seller in a bear market (from financial/emotional reasons)
  • uses the proper asset allocation (no dividend stock is a true bond alternative)
  • is designed to ride out 3 to 6-year bear markets
  • can let you sleep well at night no matter what the market is doing.

While plenty of dividend stocks are recession-RESISTANT, none are truly recession-proof. Only Treasury bonds/bills, that won’t be defaulted on unless the US government ceases to exist (in which case none of us will care about our portfolios) are truly recession-proof.

BIL, GBIL, SCHO, and VGSH are four fine 100% t-bill cash equivalent ETFs to consider right now.

FUTBX and OGGAX are some of the best intermediate US bond funds to keep in mind.

SPTL and FBLTX are great choices for long-duration US treasury funds/ETFs that have the highest rate sensitivity but also the most hedging power during a recession.

When you combine these eight truly recession-proof stocks with a well-diversified collection of quality dividend growth stocks, it creates a recession-proof SWAN portfolio that lets you ride out the bear market while sleeping well at night so that you can enjoy the coming bull market that will make all this short-term pain worth it

—————————————————————————————-Dividend Kings helps you determine the best safe dividend stocks to buy via our Master List reference/screening tool. Membership also includes

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Click here for a two-week free trial so we can help you achieve better long-term total returns and your financial dreams.

Disclosure: I am/we are long vgsh, SPTL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Dividend Kings owns VGSH and SPTL in our portfolios.

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