Recession-proof stocks are having a moment

By Julia Horowitz, CNN Business

Investors are worried that the risks of a recession are rising in the United States. In Europe, they fear economies could also stall while inflation soars, delivering the toxic combination known as “stagflation.”

That’s encouraging Wall Street to buy up defensive stocks that have historically performed well even under difficult circumstances.

Health care companies in the S&P 500 are up 3.8% in April, while the broader index is down 0.7%. The utilities sector has climbed 3.1%, and companies that make consumer staples like food and hygiene products have risen 3.6%.

In Europe, health care companies in the benchmark STOXX 600 are up 6% this month, while the broader index is just 1% higher. Utilities have increased 3.5% in April.

“Given high levels of uncertainty, we do recommend investors add to hedges, including defensive sectors such as global healthcare,” strategists at UBS Global Wealth Management told clients this week.

Pfizer was one of the best performing stocks in the United States on Thursday after it announced it was buying ReViral, which is developing drugs to treat a common respiratory virus. Pfizer shares rose 4%, and are now almost 7% higher this month.

Health care is the favored defensive pick among Citi strategists, too. They said revenue from Covid-19 vaccines and treatments, as well as “an ongoing need for boosters,” will continue to support companies in the sector, and that industry mergers are likely to intensify.

Traders aren’t in full-blown fear mode, as they were one month ago, but there’s enough uncertainty about the outlook to inspire a degree of caution.

Why play defense? In Europe, as the war in Ukraine continues, there’s a growing consensus that sky-high energy prices will wreak havoc on the region’s economy.

“If energy prices were to return to early-March highs and stay there, the eurozone could slip into recession,” said Simon Wells, chief European economist at HSBC. “Stagflation is a real risk.”

In the United States, meanwhile, Deutsche Bank is forecasting a recession next year as the Federal Reserve pulls back support for the economy in a bid to cap inflation. On Friday, Michael Hartnett, Bank of America’s chief investment strategist, said he believes a “recession shock” is coming to markets.

Wall Street is currently locked in a debate about whether anxiety about the economy is fully reflected in stock market prices. If not, defensive shares could continue to outperform.

Lockdowns in China pose a growing threat to the economy

China’s unwavering commitment to stamping out Covid by locking down big cities such as Shanghai threatens to deal a hefty shock to its vast economy, place more strain on global supply chains and further fuel inflation.

The latest: Shanghai — home to China’s leading financial center and some of its largest sea and airports — has been under lockdown for 12 days, and there’s no sign the restrictions will lift soon, my CNN Business colleague Laura He reports.

Small businesses have been hit hard, with shops and restaurants being forced to shut down. Tesla, as well as many Chinese manufacturers, are unclear about when they can restart their factories. Meanwhile, port delays are getting worse, and air freight rates are soaring, putting even more pressure on global trade.

The stringent restrictions have dispelled any expectations that the country may relax its zero-tolerance approach towards Covid-19.

“The surging cases in Shanghai convinced top leaders that there is no middle ground between zero-Covid and living with Covid. From now on, snap lockdown could be the prevailing strategy,” said Larry Hu, chief economist for Greater China at Macquarie, in a research report this week.

President Xi Jinping has pledged to “minimize” the economic impact of his Covid policy, but the deteriorating situation in Shanghai — and the extended lockdown — raises tough questions about Beijing’s approach to outbreaks of Omicron, a much more infectious variant of the original virus.

“The Omicron variant is highly infectious, and it has become increasingly challenging for China to reach its ‘zero-Covid’ objectives while most other countries opt for a ‘living with Covid’ approach,” Ting Lu, managing director and chief China economist for Nomura, wrote in a research note.

He believes that China’s rising cases and escalating lockdowns in Shanghai and several other cities will suppress activity across a wide range of sectors, including in-person services, travel, logistics, construction and some manufacturing.

“The economic costs could be staggering,” Lu said, adding that global investors may be “underestimating” the impact of China’s zero-Covid policy on its economy and the markets.

Good news on student loans was bad for this stock

The Biden administration’s decision to extend a pause on federal student loan repayments through the end of August was cause for celebration among 43 million Americans.

Not so much for the fintech company SoFi, whose shares plunged on Thursday, my CNN Business colleague Paul R. La Monica reports.

SoFi offers private student loans and refinancing to undergraduates and their parents, as well as to grad students.

That means the White House’s move to extend its payment moratorium this week will dent its sales and profits, the company said.

And SoFi doesn’t expect the situation to change any time soon, pointing to the fall midterm elections. It said it thinks the pause will be extended again and remain in place throughout 2022.

It now expects earnings of about $100 million this year. Its previous forecast was for a profit of $180 million.

That said: The extension of the moratorium could help the broader stock market if it buttresses the US economy. While the pause costs the US government about $4 billion a month, it provides debt relief equivalent to an average of $5,500 per borrower, according to a recent analysis by the nonprofit Committee for a Responsible Federal Budget.

Up next

India’s central bank announces its latest policy decision.

Coming next week: US inflation data for March could supercharge the debate about how aggressive the Federal Reserve needs to be and whether the central bank could tip the economy into a recession.

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