Tuesday's big market rally in response to the U.S. delaying its next tariff increase until at least December has been more than wiped away on Wednesday's big stock losses.
The Dow Jones dropped over 700 points as the market reacted to the yield curve inverting for the first time since 2005. The last seven recessions were preceded by an inverted yield curve, painting the clearest picture yet that the chance of a recession is real.
A true recession would hit the entire market, but there will be some stocks that are better positioned in a recession than the broader market. If you want to protect yourself against a potential recession you should allocate at least a percentage of your portfolio in "recession proof" stocks. Here are a few to consider.
Ross Stores (ROST)
Discount retailers are a strong defensive play during a recession. A full-blown recession will negatively impact employment, which in turn will have a negative impact on consumer confidence and spending. As budgets tighten more shoppers will turn to off-priced retailers like Ross Stores (ROST), which has continued to perform strongly in the recent bull market. The company has grown earnings by 16% annually the last five years, and analysts expect profits to rise an additional 9% per annum over the next five years. The company will next report earnings August 22 with the consensus calling for earnings of $1.12 per share versus $1.04 during the same period last year. The retailer offers a 1.0% yield and the company has a 12-year streak of increases. ROST trades at $102.53 with an average price target of $100.53.
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Waste Management (WM)
Garbage and recycling is another sector that holds up well in a recession because demand for waste removal will remain relatively in place even if a recession hits the economy. Waste Management (WM) has been a top performer in 2019 and is currently trading just pennies below all-time high. The company recently delivered a top and bottom line Q2 beat which drove the stock to a record high. The company has shown Wall Street average annual earnings growth of 13.3% and looking ahead analysts forecast profits to rise 8.6% per annum over the next five years. Waste Management pays a 1.7% dividend yield and the company has boosted its dividend 15 straight years. The stock trades at $116.95 with an average price target of $122.57.
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Johnson & Johnson (JNJ)
People get sick regardless of the overall economy, which is why healthcare related stocks are viewed as defensive plays in a recession. Johnson & Johnson (JNJ) is highly diversified and the company's diversification and strong consumer brand names makes it very attractive to investors in rocky markets. The company delivered big beats on the top and bottom line in July, and analysts expect the company to grow profits 6.7% annually over the next five years. The stock has a 2.8% yield with a 56-year of dividend increases. JNJ stock trades at $131.33 with an average price target of $148.42.
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Kimberly Clark (KMB)
Kimberly Clark (KMB) makes consumer staples such as Kleenex, Huggies and Cottonelle. The company's strong brands in its stable provides it solid defense against a possible recession. While some shoppers will look for off-name brands if the economy runs into trouble, Kimberly Clark will maintain demand for its consumer staples. The company's most recent quarterly report in July topped estimates on both the top and bottom line and helped push the stock to a new all-time higher, and it is currently just pennies below that high. In addition to strong fundamentals, the stock is also an attractive dividend play, which is very important if interest rates continue to fall. The stock has a 3% dividend yield with a 46-year streak of increases. KMB is trading at $138.25 and analysts have an average price target of $132.11.
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