Last week, in line with broad expectations on the Street, Federal Reserve Chair Jerome Powell announced the unanimous decision by the FOMC to raise key interest rates by another 25 bps. With this move, the central bank has raised the benchmark borrowing cost to 5.25%-5.50%, ratcheting it up from nearly 0% in about 16 months.
With a 2.6% rise in inflation, down from a 4.1% rise in Q1 and well below the estimate for an increase of 3.2%, and an annualized increase of 2.4% in the gross domestic product in the second quarter, topping the 2% estimate, there is increasing belief in the Market that Jerome Powell and his team at the Federal Reserve may be on the cusp of achieving the elusive “soft landing.”
In Mr. Powell’s words, “The staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession.”
However, ECB raised interest rates by a quarter percentage point shortly after, citing persistent inflation. In such a scenario, despite increased optimism, businesses are expected to remain weighed down by high borrowing costs, and economic activity is expected to remain stifled due to relatively scarce credit.
Hence, there is still a significant probability that in order to overcompensate for the infamous “transitory” call that caused the Fed to arrive (really) late in its fight against demand-driven inflation, the central bank may be sowing the seeds of economic stagflation.
Moreover, with every increase in benchmark interest rates, a selloff of long-duration fixed-income instruments, such as the 10-year treasury notes, gets triggered, which causes a slump in their market value and a consequent increase in their yields. This also increases the benchmark 30-year mortgage rates, thereby depressing demand and deepening the crisis in which real estate has lately been finding itself.
After benchmark 10-year yields jumped by as much as 15 basis points above the key 4% level, Peter Schiff, CEO and chief economist at Euro Pacific Asset Management, warned of a crash in Treasuries. He has also predicted the benchmark 30-year mortgage rates to soon hit 8%, a level last seen in 2000.
Mr. Schiff’s apprehensions have also been echoed by David Rubenstein, co-founder of The Carlyle Group, who expressed his concern regarding the fate of commercial real estate as millions of people stay home and companies try to figure out what to do with empty offices.
An increase in borrowing costs would not just raise the cost of servicing the $32.7 trillion national debt; significant markdowns prices of legacy bonds and an inability by borrowers to service them due to economic slowdown could crush the loan portfolios of struggling banks and make them go the way of the dodo, such as the Silicon Valley Bank and the First Republic Bank.
With the Bank of Japan’s policy tweak of loosening its yield curve control sparking widespread shock in the markets that have been teetering on the brink of collapse, there is a material risk that an apparently resilient economy could find itself regressing into a full-blown recession just as Jerome Powell’s colleagues at the Federal Reserve have stopped forecasting it.
With HSBC Asset Management’s warning that a U.S. recession is coming this year, with Europe to follow in 2024, gaining credibility with each passing day, investors increasing their stakes in fundamentally strong businesses could be a time-tested method to navigate Mr. Market’s wild mood swings between unbridled euphoria and manic depression.
Here are a few stocks that are worth considering amid this backdrop:
According to a recent note from Fairlead Strategies, the technology and consumer electronics giant could witness a major upside in its stock. According to the agency, the stock could jump to $254 by the end of 2024.
AAPL, which has a history of revolutionizing products like the personal computer, smartphone, and tablet, has begun scripting the next key chapter in its success story with the announcement of its first product in the AR/VR market, the Apple Vision headset, which will sell for $3,499 when it is released early next year.
Regardless of any near-term and temporary softness and slowdown, a compounding machine such as AAPL, which boasts a sticky user base with a retention rate of over 90%, assures the company of adequate cash flow through repeat purchases and upgrades.
Moreover, AAPL’s board authorized $90 billion in share repurchases and dividends. It spent $23 billion in buybacks and dividends in the March quarter and raised its dividend by 4% to 24 cents per share.
Through relentless share repurchases, AAPL increased the existing shareholders’ stake by decreasing its float, thereby increasing the remaining shares’ intrinsic value (and consequently the price) without a proportional rise in market capitalization.
JNJ has been around for 135 years and is a worldwide researcher, developer, manufacturer, and seller of various healthcare products. The company operates through three segments: Consumer Health; Pharmaceuticals; and MedTech.
Over the past three years, which have been turbulent, to say the least, JNJ’s revenue has grown at a 6.7% CAGR. During the same period, the company also registered EBITDA and total asset growth of 7.7% and 8.1%, respectively.
Despite flagging sales of Covid 19 Vaccines, JNJ’s reported sales during the fiscal year 2023 second quarter increased by 6.3% year-over-year to $25.53 billion. During the same period, the company’s adjusted net earnings increased by 6.5% and 8.1% year-over-year to $7.36 billion and $2.80 per share, respectively.
In addition to its robust financials, the relative immunity of its demand and margins to potential economic downturns make it an attractive investment option for solid risk-adjusted returns.
In a previous discussion, we deliberated on how, despite inflationary pressures and online retail altering brick-and-mortar stores in today’s economy, budget retailers, such as WMT, have been relatively immune to the seismic shifts in the consumption ecosystem.
In fact, WMT has attracted new and more frequent shoppers, including younger and wealthier customers, who are turning to Walmart for both convenience and value. Consequently, according to its earnings release for the first quarter of the fiscal year 2024, the big-box retailer surpassed expectations for both earnings and revenue, with sales rising by nearly 8%.
Encouraged by the strong performance, WMT also raised its full-year guidance. It anticipates consolidated net sales to rise about 3.5% in the fiscal year. It expects adjusted earnings per share for the full year will be between $6.10 and $6.20.
WMT’s sales have reflected the shift toward groceries and essentials, with the former accounting for nearly 60% of the annual U.S. sales for the nation’s largest grocer. In fact, WMT’s grocery business helped to offset weaker sales of clothing and electronics, as sales of general merchandise in the U.S. declined mid-single-digits, while sales of food and consumables increased low double-digits.
Another bright spot for the retail giant has been growth in online sales, which jumped 27% and 19% year-over-year for Walmart U.S. and Sam’s Club, respectively. According to Rainey, curbside pickup and home delivery of online purchases fueled the growth.
Far from being complacent, WMT has been doubling down on initiatives, such as reducing and optimizing packaging and leveraging AI/ML to increase the efficiency of its operations.
As an energy company, DUK operates through two segments: Electric Utilities and Infrastructure (EU&I) and Gas Utilities and Infrastructure (GU&I).
Over the past three years, DUK’s revenue increased at a 5.4% CAGR, while its EBITDA has increased by 4.2% CAGR over the same time horizon.
On July 13, DUK announced its quarterly cash dividend of $1.025 per share of common stock, an increase of $0.02, and $359.375 per share on its Series A preferred stock, equivalent to $0.359375 per depositary share, payable on Sept.18, 2023, to shareholders of record at the close of business on Aug.18, 2023.
DUK currently pays $4.10 per share of common stock as annual dividends, which have grown for the past 11 years and at 2.5% CAGR over the past five years. Through the consistent return of capital, DUK provides adequate income generation opportunities for investors to help them tide over economic uncertainty.
On July 6, at Amazon Air Hub, DUK unveils Kentucky’s largest utility-scale rooftop solar site, consisting of over 5,600 photovoltaic panels. It will feed up to 2 megawatts of solar power directly onto the electric distribution grid.
Utility companies such as DUK provide essential services that remain relevant and in demand regardless of economic inconsistencies.
