As investors weigh the U.S. economic outlook, Jefferies shared a stock playbook for two potential scenarios: a prolonged wind-down of the economy, or an imminent recession. Economic growth is poised to slow after a banner 2021. The U.S. economy last year grew at its fastest pace since 1984 . By contrast, the Atlanta Federal Reserve's GDPNow gauge is currently tracking a first-quarter gross domestic gain of 1.3%, versus a 6.9% annualized pace in the fourth quarter. With the Fed hiking interest rates and trimming its balance sheet to address sky-high inflation , market participants are increasingly worried about the risk of a recession . "Current Fed policy and hawkish commentary, momentary curve inversion and falling economic growth forecasts have turned attention toward the end of the cycle," Jefferies equity research analysts said in a note Tuesday. Jefferies' chief economist Aneta Markowska does not see a recession occurring in 2023. With households and businesses having more cash on hand than in previous economic cycles, Markowska expects demand will not be as sensitive to rising interest rates. However, Jefferies said the Fed could act more aggressively to tamp down on rising prices, thus contracting the economy faster than anticipated. "The Fed could always act unexpectedly and the economy might react erratically to tightening, and that has created a debate around the timing of the eventual slowdown," the note said. Jefferies identified the best stocks to meet the moment in the two different scenarios, which the firm described as "an immediate recession or a protracted wind-down phase for this economic cycle." Scenario 1: Slowdown Jefferies called the scenario of an extended slowdown an "economic twilight." Take a look at five stocks the firm recommends in this case. Consumer discretionary stocks feature prominently on this list, as analysts bet customers' cash cushions can drive outperformance for these companies in a scenario of a prolonged slowdown. Take restaurant and entertainment chain Dave & Buster's . The company is "well positioned to capitalize on latent consumer demand for services/experiences and is most insulated among company owned models from inflationary headwinds given amusements/games business," according to Jefferies analyst Andy Barish. Off-price retailer TJX Companies could also benefit from an "economic twilight" environment, Jefferies said. The company's value positioning could attract new customers, while inflation also allows TJX to raise prices and drive revenue growth, according to analyst Corey Tarlowe. In the payments sector, Block could be an outperformer, according to Jefferies. Block's Cash App product with exposure to lower-income consumers should benefit from wage inflation, said analyst Trevor Williams. Booking Holdings and Macy's also made Jefferies' "economic twilight" list. All stocks in the firm's basket have a buy rating. Scenario 2: Recession If the economy contracts sooner than expected, Jefferies laid out stocks for a recessionary environment. Take a look at five of the firm's picks. Stocks on this list trended toward defensive names like consumer staples, which tend to be stable regardless of how the overall market performs. Restaurant analyst Barish sees McDonald's as a top choice in this scenario, as he "would expect continued business model resiliency driven by scale, convenience and pricing power." Dollar General is another potential recession outperformer, given the discount retailer's value orientation. "DG has a tendency to perform well in all cycles of the market," according to Tarlowe. The retail industry analyst said "the company could drive sizable share gains and incremental customer adoption in the event of a recession and subsequent consumer trade-down." Sticking with the value theme, Jefferies' consumer analyst Stephanie Wissink sees Walmart as a top choice in a recession scenario. Walmart's high exposure to grocery could benefit from tightening wallets as consumers opt to eat at home more, she noted. Also making Jefferies' recession-beneficiary list are Mondelez International and Bank of New York Mellon . —CNBC's Michael Bloom contributed to this report.
The logo for McDonald's is seen on a restaurant in Arlington, Virginia, January 27, 2022.
Joshua Roberts | Reuters
As investors weigh the U.S. economic outlook, Jefferies shared a stock playbook for two potential scenarios: a prolonged wind-down of the economy, or an imminent recession.