Can you stay afloat amid tough economic times? These "recession-protection" stocks can save your portfolio!

Wednesday: The Independent Investor FROM THE DESK OF MILES EVERSON: Welcome to “The Independent Investor!” We’re excited to share with you another useful investing insight today. Every Wednesday, we publish articles about various investing tips and advice to help you strategically think about your financial choices and achieve true wealth in the long run. Ready to know more about today’s topic? Keep reading the article below. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

Can you stay afloat amid tough economic times? These "recession-protection" stocks can save your portfolio! In March 2023, U.S. traders gave the central bank an 85% probability of raising interest rates at the next Federal Open Market Committee (FOMC) meeting. According to Robert Spivey, Director of Research at Valens Research, this came as a surprise, considering higher rates were a key contributor to the second-largest bank collapse in the history of the U.S. However, with much of the damage contained, the Federal Reserve still has lots of work to do to combat inflation. Let’s backtrack a little bit… In February 2023, the FOMC boosted rates by 25 basis points, bringing the federal-funds rate to 4.75%. The Fed made it clear that it would keep raising interest rates as long as the U.S. economy stays hot. Spivey said this hurt lots of industries outside of banking. The rising interest rates left companies with large debt obligations particularly exposed. This was one of the reasons why the Silicon Valley Bank (SVB) collapsed: It was a favorite of venture capital (VC) firms… and when these firms started worrying about paying their bills and withdrew from SVB, the bank needed more cash. Most of SVB’s money was in supposedly “safe” assets like mortgage-backed securities and U.S. Treasuries. The problem? The value of these assets dropped due to rising interest rates! This meant SVB had nowhere to go to raise enough money. Similarly, private equity firms survive on mergers and acquisitions (M&A). In order to buy other companies, develop them, and sell them at a premium, these PE firms need to borrow money. The thing is, when the cost to finance such acquisitions rises, these private equity firms find it harder to make the big returns investors are expecting. That’s why for Spivey, businesses need to focus on cutting costs and boosting their efficiency to stay afloat, especially in today’s economic environment. Why You Should Have Some Form of “Recession-Protection” in Your Investment Portfolio Many people view consulting services as expensive. That’s why it’s no surprise that lots of folks assume these services might be the first ones to go when firms start slashing their budgets. These people couldn’t be further from the truth. Contrary to popular belief, consulting firms are actually resistant to recessions. After all, they are the ones clients need most during tough economic times. Allow us to explain further… Instead of paying consultants to work on growth opportunities, clients hire these professionals for outsourcing and cost-efficiency. Because of that, consulting firms tend to have stable revenue through economic cycles. Take for example consulting giant Accenture’s performance over the last 15 years. Based on Uniform Accounting standards, the firm has consistently generated a Uniform return on assets (ROA) of above 40%. That’s more than three times the corporate average! What’s more? Accenture’s Uniform ROA didn’t even budge during two crises: The 2008 Great Recession and the 2020 COVID-19 pandemic. In fact, in 2008, the company’s stock fell less than 10% when the entire S&P 500 fell almost 40%. In 2020, Accenture’s stock rose 24% when the S&P 500 was only up around 16%. The firm’s profitability also grew above 60% for the first time ever in 2020. This shows that instead of hurting the firm’s revenues, the pandemic ended up helping Accenture. … and just to let you know—Accenture wasn’t the only one. Other big consulting firms like Boston Consulting Group (BCG), Deloitte, and Ernst & Young (EY) all had record years in 2020, too. This proves that when other companies feel like they’re on shaky ground, they turn to businesses that can help them pull through. — The Fed’s rate hikes are showing no signs of slowing down. Eventually, it will tip the U.S. markets into a recession. According to Spivey, if and when that happens, it will be another great opportunity for consulting firms. History has shown that these stocks hold up well in a downturn… and there is no reason to believe this time will be different. This is one of the reasons why Spivey and his team at Altimetry Financial Research include consulting stocks in all of their monthly advisories. These stocks serve as a reminder that investors should always be holding some form of “recession-protection” in their investment portfolios. Hope you’ve found this week’s insights interesting and helpful.     John Templeton, the founder of the Templeton Growth Fund, once said: “The four most dangerous words in the English language are, ‘This time, it’s different.’” Learn more about why today’s financial market is VERY different from what we had in the Great Recession of 2008 in next week’s article!