Wells Fargo unveils its recession stock portfolio
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Wells Fargo says it is time to close out reopening trades and focus on the new landscape of a slowing economy.
The rise in the 2-year Treasury yield (SHY) above 3% was the catalyst for a hard economic landing to become the base case, senior equity analyst Chris Harvey wrote in a note Tuesday.
The team is moving to Neutral from Overweight in their High Covid Beta reopening portfolio, which rose 48% since its inception in October 2020, compared with an 11% rise in the S&P 500 (SP500) (SPY). The High Beta portfolio is -10% year to date, besting the 21% drop in the S&P.
The economy faces a markets-driven recession, according to Harvey.
"According to Fed data, at the end of 2021 nearly one quarter (24.3%) of US household assets were in equities," he said. "We viewed this as a major risk as a material, extended sell-off likely would impair sentiment and discretionary spending."
"We believe this vicious cycle has been triggered - and is complicated by the corner the Fed has painted itself into. We estimate US household assets could decline some $6T (4%) in 2Q22 due to the market selloff."
Once in a recession, the Fed will likely turn quickly to easing, Harvey said.
"For equities, this would mean more volatility, a better bid for risk-aversion, and a decay of cyclicality until the easing cycle begins. Therefore, our shift on the reopening names."
"We are not looking for a level, but rather an event (or events) to stabilize equities," Harvey added. "Stocks likely will find a bottom when the market believes Fed hikes will begin to decelerate. To get there, we will need to see jobless claims numbers continue to rise, suggesting supply/demand is better aligning and breakevens continue to decline (implying inflation expectations are abating)."
"We believe this is still off in the distance."
The recession portfolio by sector (all stocks weighted 1.8%):
Communication Services (XLC)

Fox (NASDAQ:FOX)
AT&T (T)
Electronic Arts (EA)
Comcast (CMCSA)
Verizon (VZ)

Consumer Discretionary (XLY)

Lowe's (NYSE:LOW)
Garmin (GRMN)
Genuine Parts (GPC)
Yum! Brands (YUM)
McDonald's (MCD)

Consumer Staples (XLP)

Hershey (NYSE:HSY)
Mondelez (MDLZ)
Colgate-Palmolive (CL)
Coca-Cola (KO)
PepsiCo (PEP)

Energy (XLE)

Marathon (NYSE:MPC)
ONEOK (OKE)
Chevron (CVX)
Williams (WMB)
Kinder Morgan (KMI)

Financials (XLF)

Travelers (TRV)
W.R. Berkley (WRB)
Chubb (CB)
Loews (L)
Berkshire Hathaway (BRK.B)

Healthcare (XLV)

Amgen (AMGN)
Gilead (GILD)
Merck (MRK)
J&J (JNJ)
Bristol-Myers (BMY)

Industrials (XLI)

3M (MMM)
General Dynamics (GD)
Republic Services (RSG)
Ametek (AME)
Waste Management (WM)

Info Tech (XLK)

Automatic Data (ADP)
Broadridge Financial (BR)
Roper Technology (ROP)
Jack Henry (JKHY)
IBM (IBM)

Materials (XLB)

Packaging Corp. (PKG)
Air Products (APD)
Dow (DOW)
Corteva (CTVA)
International Paper (IP)

Real Estate (XLRE)

Healthpeak Properties (PEAK)
Mid-America Apartment (MAA)
AvalonBay (AVB)
Welltower (WELL)
Realty Income (O)

Utilities (XLU)

DTE Energy (DTE)
Dominion Energy (D)
Public Service Enterprise Group (PEG)
Duke Energy (DUK)
Ameren (AEE)

See MKM's buy/sell pair trades for every sector.