A recession is looking very likely … what our strategic experts say about the sectors that will outperform … where Louis Navellier is putting his money … what the Fed does now

We’re either in or headed for a recession.

That’s the conclusion of an increasing number of well-respected hedge fund managers, corporate executives, and financial talking heads.

The list includes Stan Druckenmiller, Paul Tudor Jones, Jamie Dimon, Leon Cooperman, Ken Griffin, Ray Dalio, David Einhorn, and Mohamed El-Erian, just to name a few.

And while President Joe Biden finally acknowledged a “slight” recession might happen, that’s not what these people are seeing…

Druckenmiller: “I will not be surprised if it’s not larger than the so-called average garden variety. I don’t rule out something really bad.”

Dimon: “This is serious stuff… JPMorgan is bracing ourselves and we’re going to be very conservative with our balance sheet.”

Einhorn: “This feels like trying to figure out whether it’s best to clear a foot of snow from your driveway with a soup ladle vs. an ice-cream scooper.”

Dalio: “…It looks likely to me that the inflation rate will stay significantly above what people and the Fed want it to be, that interest rates will go up, that other markets will go down, and that the economy will be weaker than expected, and that is without consideration given to the worsening trends in internal and external conflicts and their effects.”

Finally, on a global scale, there’s Pierre Olivier Gourinchas, the chief economist for the International Monetary Fund saying, “We are not in a crisis yet, but things are really not looking good.” He added that 2023 will be the “darkest hour” for the global economy.

Keep in mind, all these quotes were made before yesterday’s CPI data that makes another 75-basis-point hike from the Fed in November a lock as far as Wall Street traders are concerned. According to the CME Group’s FedWatch Tool, the odds of this are now 99.3%.

Bottom line: Rates are rising faster than any other time in recent history – and the likelihood that this ends in a recession is high.

So, let’s get proactive.

How do we invest for a recession?

That’s what our technical experts John Jagerson and Wade Hansen tackled in their latest issue of Strategic Trader.

From their Wednesday update:

When the U.S. economy starts to contract and the tide starts falling, not all stocks perform equally. Some sectors tend to outperform while others woefully underperform.

However, the good news for investors during these pullbacks is that the market tends to respond relatively predictably when the pullbacks occur. The same sectors that outperformed during previous economic contractions are likely to outperform during the next.

John and Wade provide the chart below that shows the interplay between stocks and the business cycle, as well as historical sector performance.

Based on past economic contractions, John and Wade expect the following sectors to outperform:

• Energy
• Healthcare
• Consumer Staples
• Utilities

So, how have these sectors been performing since August 16, which is when the S&P hit its most recent peak?

Back to John and Wade:

Looking at a comparison chart of the 11 S&P 500 sectors and the S&P 500 itself (tracked by State Street Global Advisors through their Select Sector SPDR funds), you will see the following performance:

• Energy Select Sector SPDR® Fund (XLE): 2.30%
• Health Care Select Sector SPDR® Fund (XLV): -8.19%
• Consumer Staples Select Sector SPDR® Fund (XLP): -10.44%
• Financial Select Sector SPDR® Fund (XLF): -14.32%
• Industrial Select Sector SPDR® Fund (XLI): -14.58%
• Materials Select Sector SPDR® Fund (XLB): -15.23%
• SPDR® S&P 500 Fund (SPY): -16.47%
• Utilities Select Sector SPDR® Fund (XLU): -18.29%
• Consumer Discretionary Select Sector SPDR® Fund (XLY): -19.05%
• Communication Services Select Sector SPDR® Fund (XLC): -20.21%
• Technology Select Sector SPDR® Fund (XLK): -22.88%
• Real Estate Select Sector SPDR® Fund (XLRE): -25.62%

Nearly all of the sectors you would expect to see outperforming during an economic contraction are currently outperforming.

The one exception is the Utilities sector.

As you know, the Fed has been raising rates relentlessly over recent months, leading to a massive surge in the 10-year yield. Over the last 12 months, the yield has exploded 151%, and as I write Friday morning, it now sits at 4%.

Back to John and Wade to explain why surging yields hurt utilities:

The higher Treasury yields go, the less competitive dividend yields on Utilities stocks become.

Since strong dividend yields are one of the primary factors that drive the outperformance of Utilities stocks during economic contractions, we are seeing Utilities stocks lagging a bit during this downturn.

John and Wade’s bottom line on where to be invested right now

Our technical experts like healthcare stocks and consumer staples stocks, anticipating they’ll continue outperforming.

Meanwhile, they caution energy investors:

Energy stocks may not perform as well if the price of crude oil continues to bounce down from the down-trending resistance level it hit on Monday.

Finally, for the direction of the broad S&P, John and Wade pointed toward the earnings performance of the big banks – specifically JPMorgan Chase, Citigroup, and Wells Fargo, that all reported this morning.

In their Wednesday update, they wrote that if these banks can beat expectations, we might see the S&P 500 start to bounce higher.

It turns out JPMorgan topped estimates this morning thanks to greater interest income generated by rising rates. Citigroup’s net income fell 25% year-over-year as it bulked up its credit loss provisions, but revenues beat expectations. Wells Fargo beat expectations even while beefing up its loan loss provisions.

All in all, it’s a solid performance by the banks. If John and Wade are right, hopefully the S&P can build off this strength in the coming days.

Meanwhile, let’s check in with Louis Navellier for his latest thoughts on what to expect out of the Fed following yesterday’s CPI data

Yesterday, the Consumer Price index came in hot, increasing 0.4% month-over-month. That’s more than the 0.3% Dow Jones estimate.

Worse, core CPI notched its largest 12-month gain since August 1982.

So, what does this mean for Fed policy as we eye the end of the year?

Yesterday, in his Accelerated Profits market update podcast, Louis provided the roadmap:

Inflation is structural. [The Fed] can’t get rid of it.

So, what does this mean?

The Fed’s going to keep raising rates. They’re going to raise rates six days before the mid-term elections, 75 basis points.

They will raise rates in December when we’re all engrossed in the holidays. Whether they do 75 or 50 basis points doesn’t matter – let’s just be done with it. Let’s just hope that’s the last one.

And then they’re going to hold rates extra high next year to make sure inflation is dead.

Louis goes on to say that these rates hikes have already killed the housing market. Now, look for these elevated rates to kill other interest-rate-sensitive parts of the economy.

So, where is Louis placing his chips in this challenging climate?

Regular Digest readers already know the answer: energy – which happens to be one of the sectors that John and Wade identify as an outperformer during a contraction.

But what about John and Wade’s word of caution on crude oil prices?

Well, Louis isn’t concerned with shorter-term price fluctuations. Big picture, even if oil falls back toward $80 a barrel, prices are still high enough to produce fantastic earnings for top-tier oil companies for the next two quarters.

So, let’s put it all together…

It appears we’re barreling toward a recession. Given this, take a hard look at healthcare, consumer staples, and energy stocks to help support your portfolio during tough times.

Have a good evening,

Jeff Remsburg