3 Essential Recession Stocks to Buy as US Downturn Prospects Linger

As economic turbulence continues to impact the United States, could it be worth investors looking to recession stocks in a bid to counter a downturn in 2024?

Forecasters are largely confident that the US economy will have a soft landing in the year ahead, but with some red flags continuing to linger, will a recession be averted? 

There have been many headwinds impacting US markets in recent years. The post-pandemic recovery led to historically high inflation rates that the Federal Reserve moved aggressively to contain with the implementation of rate hikes that left consumers facing rising living costs while Wall Street suffered significant losses throughout 2022. 

Add to this the growing list of geopolitical tensions throughout the world, and it’s clear to see why recession forecasts have been slow to go away in recent months. 

“You are beginning to see signs of stress,” warns Troy Ludtka, senior US economist at SMBC Nikko Securities. “Our call is that there will be a recession.”

This sentiment has been echoed by Morgan Stanley’s equity team, which highlighted that interest in the US bond market is a sign that investors remain wary of slowing growth. 

“Over the past 6 months, interest rates have been the most important determinant of equity index performance, in our view,” explained the equity team. “We see this continuing in the near term, and believe interest rate volatility is an important consideration for equity investors, particularly as economic forecasts have centered around a narrow range of outcomes.”

Given that a recent study from The Conference Board suggests that just 37% of CEOs in the United States are ready to deal with a recession, while 34% are ready for high inflation, the prospect of any further economic volatility could be disastrous across a range of industries. 

We only have to look at the ongoing supply chain issues with shipping in the Panama and Suez canals to gain a taste of how volatility can emerge from anywhere to hit markets. 

“The Fed may need to keep rates at a higher level for longer than investors expect to fully tame inflation, considering the 2% target,” said Maxim Manturov, head of investment research at Freedom Finance Europe. “This could negatively impact U.S. market indicators, as higher rates make stocks less attractive compared to other asset classes, such as bonds.”

“Given the yield curve inversion, the risk of a recession still exists, although its likelihood is gradually decreasing based on incoming macroeconomic data.”

Recession Prospects Remain Remote

Amid the gloomy warnings circling the US economy, it’s important to highlight that many market analysts believe that the chances of a 2024 recession remain remote. 

According to a recent Wall Street Journal survey of economists, the probability of a recession in the coming 12 months sits at 39%, down from the 48% recorded back in October 2023. 

There’s also strong evidence that the Fed’s hawkish policy for rate hikes has helped to lower inflation significantly over the past year, with December 2023’s 3.35% inflation rate weighing in at almost half that of December 2022. 

Cooling 10-year Treasury yields can be a sign that we’ve reached peak inflation also. With yields falling from 4.77% to 4.22% in December 2023, we can see growing investor interest in the price of ‘risk-on’ assets. Recent gains in cryptocurrency markets, with Bitcoin regarded as the ultimate risk-on asset, can also be interpreted as a sign of growing optimism throughout the investment landscape. 

These signs of recovery are important. According to Julian Emanuel, senior managing director at Evercore ISI, a mild recession could send stocks tumbling 14% in early 2024–dragging the S&P 500 down to 3,970 in the process. 

Should Investors Brace for a Downturn?

With evidence of investors turning to bonds as economic concerns linger throughout the United States, it could be worth asking whether or not it’s worth buying into Wall Street stocks altogether should a recession take hold. 

However, stocks typically rebound strongly in the wake of a downturn, and there are plenty of defensive stocks that can be picked up that offer more resilience in recessions. 

This means that investors have the opportunity to add stocks that historically performed well during a recession to maintain their performance should a downturn occur. Three key examples of these stocks are: 

1. Walmart Inc. (NYSE:WMT)

Walmart is a great stock to pick up because discount retailers typically feature high levels of demand during economic contractions. Essential shopping is always required, and during a recession it’s more likely that Americans will look to low-cost stores as opposed to more premium-quality brands. 

In addition to this, we can see from Walmart’s stock market performance that the stock has shown plenty of resilience during the 2008 economic crisis and the Covid-19 market contraction in 2020. 

According to analyst Arun Sundaram, Walmart will also seek to implement more automation technology and high-margin businesses such as advertisement and fulfillment services to improve profitability in the future–suggesting that there’s plenty more to come for this popular Wall Street player. 

2. Merck & Company, Inc. (NYSE:MRK)

Pharmaceutical firm Merck has seen steady growth throughout the past 14 years following a healthy recovery from an initial dip in the wake of the recession that followed the 2008 Wall Street crash. 

The company’s earnings per share (EPS) has grown by an average of 47% per year over the past five years and analysts anticipate almost 12% annual earnings growth over the coming five years. 

Much like discount retailers, pharmaceutical companies stay largely unhindered during recessions because of the essential nature of healthcare. This, coupled with an aging population and the ongoing medtech boom makes Merck a strong option for portfolios during a downturn and beyond. 

3. Dollar General (NYSE:DG)

The great thing about Dollar General is that its performance is largely unmoved by economic conditions. It’s for this reason that the stock is an excellent option should the prospect of a recession continue to linger. 

With 18,818 locations throughout 47 states, the store is omnipresent throughout the United States, and is continuing to grow on an international scale. In 2023, Dollar Central opened its first store in Mexico, highlighting the chain’s eagerness to expand despite wider economic headwinds. 

As we can see from recent market performance, Dollar General has struggled for much of 2023 due to slowing sales and high-profile safety violation fines. However, the company’s returning CEO, Todd Vasos, has sought to drive a turnaround in fortunes of late. Given that January 2024 saw Barclays analyst Seth Sigman upgrade the stock Overweight from Equal Weight, the early signs are looking great for the store’s long-term recovery. 

Research Essential as Volatility Lingers

While the prospect of recession remains relatively remote, Wall Street has been prone to quick sentiment changes and high volatility in the post-pandemic years, and investors would do well to ramp up their research and stay ahead of changing market conditions. 

Whether a recession is on the horizon or not, in picking up more resilient stocks, portfolios can stand a greater chance of overcoming any economic downturns throughout the early months of 2024–paving the way for a stronger year overall.