Goldman says investors need a new recession playbook, recommends these stable stocks

Published Mon, Jun 6 202210:11 AM EDTUpdated Mon, Jun 6 202210:37 AM EDT

Stocks with strong balance sheets typically beat the market when the economy is going into a recession, but Goldman Sachs said that may not be the case this time. Instead, the firm recommended investors own stable stocks — as well as companies with excess cash — amid growing fears of an economic downturn. "In today's environment, many of the strongest balance sheet stocks are also growth stocks," Goldman chief U.S. equity strategist David Kostin wrote. "Given the overlap between Strong Balance Sheet and growth stocks today, the balance sheet trade will likely continue to reflect Growth vs. Value and interest rate risk rather than represent an expression of 'quality' attributes." The firm pointed out that, during the 2011 tech bubble burst — which many investors are comparing to today's environment — strong balance sheet stocks underperformed. A recession is not the base case for Goldman, with their economic team assigning a 35% probability of one occurring in the next two years. But the firm acknowledged that companies and investors appear to be more worried about a recession, so clients should be prepping their portfolio to combat one. Based on history, Goldman expects the S & P 500 to decline to 3,600 in a recession. The benchmark closed Friday at 4,108.54, down about 15% from its high. "At 4115, investors appear to have priced a meaningful amount of recession risk into US equities," Kostin wrote in the Friday note. What to buy instead Investors looking to own quality should turn first to stocks with a historical track record of stable cash flow growth, Goldman said. Here are five of the stocks from the firm's stable growth portfolio basket. Goldman also sees an opportunity for investors to buy shares throwing off excess cash that the companies could return to shareholders during a recession. "Historically, when economic growth slows, investors reward stocks spending the most on buybacks and dividends," the note said. The following stocks have strong balance sheets but also high cash return yields, according to Goldman. "Amid growing recession concerns, focus on stability and cash return rather than balance sheet strength," wrote Goldman.

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