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The Street
The Street
Dan Weil

Stocks See Worst Start in Half a Century; Here's What to Buy

As you’re likely aware, the stock market is taking a tumble this year. As of the June 12 close, the S&P 500 had dropped 21% year to date.

If it maintains that level through month-end, this will be the largest slide by the S&P 500 for the first six months of a year since 1970. The index also fell 21% in that period, according to Bloomberg.

Analysts at Wells Fargo think stocks will remain weak. “A hard landing [for the economy] has become our base case,” they wrote in a commentary.

“We believe the recession starts in the markets since the economy has the highest equity beta in decades—i.e., the stock sell-off weighs on sentiment, then discretionary spending, and ultimately the economy,” the analysts said.

As for when stocks might recover, “we aren’t looking for a level, but rather an event (or events) to stabilize equities,” the analysts said. “Stocks likely will find a bottom when the market believes Fed hikes will begin to decelerate…. We believe this is still off in the distance.”

Recession Portfolio

In the meantime, the analysts put together a “recession portfolio” consisting of the lowest price-volatility stocks in each of the 11 S&P500 sectors.

Here are 10 of the choices:

· McDonald’s (MCD), the fast-food restaurant titan;

· Mondelez (MDLZ), the food company that makes Oreos;

· Chevron (CVX), the big oil producer;

· Berkshire Hathaway (BRK.B), the conglomerate run by Warren Buffett;

· Merk (MRK), the pharmaceutical giant;

· General Dynamics (GD), the aerospace company;

· IBM (IBM), the technology icon;

· Dow (DOW), the chemical company;

· Welltower (WELL), a healthcare REIT; and

· Duke Energy (DUK), the utility stalwart.

Stocks versus Bonds

Meanwhile, bonds have tanked this year too, with the Bloomberg U.S. Aggregate Total Return bond index falling 12%.

So for investors who have cash they want to put to work, which represents a better bargain, stocks or bonds? The Street asked five experts, and their responses were mixed. Three said equities, one said bonds, and the fifth said neither one.

Michael Sheldon, chief investment officer at RDM Financial Group Hightower selected stocks as the better bargain, given their historical outperformance over bonds.

“Bonds provide income and stability, while stocks provide income and growth,” he said. “Stocks have more upside potential, but are more volatile.”

Jack Ablin, chief investment officer at Crescent Capital chose bonds as the better bargain. Both stocks and bonds are basically at fair value after their declines, he said.

But, bonds are probably a better deal than stocks right now, at least over the next couple quarters, Ablin said. That’s because “bond yields are high enough to serve as a hedge for stocks,” he said. The five-year Treasury recently yielded 3.22%.

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