How to fight against recession? Investors: Take a look at Coca Cola and Colgate?

Due to increasing concerns about the economic recession in the United States, market risk aversion is rising, and investors are eagerly seeking a "safe haven" for funds.

In recent weeks, the essential consumer goods sector in the United States has shown strength, with defensive stocks such as Coca Cola and Colgate becoming new favorites among investors.

Coca Cola and Colgate Shine

Year-to-date, Coca Cola's stock price has risen by about 20%, while Colgate has surged by over 30%. In the past month, the stock prices of retailers Walmart and Target, as well as consumer goods manufacturer Clorox, have risen by 14.8%, 9.1%, and 15.6% respectively, far exceeding the modest 4.5% increase in the S&P 500 index during the same period.

Irene Tunkel, Chief U.S. Stock Strategist at BCA Research, stated:

"Historically, defensive stocks like essential consumer goods perform well before the Federal Reserve cuts interest rates, which usually occurs when there is sufficient evidence of an economic recession. If market optimism returns, essential consumer goods will start to underperform."

Last week, Morgan Stanley added Coca Cola and Colgate to its list of recommended stocks, advising clients to focus on "companies that prioritize operational efficiency or have sustainable pricing power, or defensive companies that possess both." These types of companies often maintain stable performance during economic downturns.

The Rise of the "Anti-Fall" Essential Consumer Goods Industry

Bloomberg data shows that the U.S. essential consumer goods sector, including well-known brands such as Kraft Heinz, Procter & Gamble, and Walmart, outperformed the blue-chip index in six out of the past eight weeks. Last week, the essential consumer goods index reached its highest level relative to the blue-chip index since March 2020, but has since retreated in recent days.

This achievement marks an expansion in the scope of this year's stock market rebound, which was previously driven mainly by large tech stocks. However, the market is now beginning to express concerns about the slowing profits of previously dominant tech stocks. Meanwhile, as cracks begin to appear in the U.S. labor market, it has sparked disagreements in the market regarding the extent to which the Federal Reserve should cut interest rates, as well as concerns about the possibility of the United States quickly falling into a recession.

Former Chief Strategist and Analyst at Leuthold Group, Jim Paulsen, stated:

"An economic recession clearly causes defensive stocks to outperform the broader market, while strong economic growth instead leads to underperformance for them." Data collected by Deutsche Bank on fund flows shows that investors' positions are currently "leaning towards" defensive stocks in the bond category, including essential consumer goods, real estate, and utilities.

It is worth noting that the essential consumer goods industry often lags behind the market in a bull market, but catches up during economic downturns. This industry performed well during the sell-off period in 2022, but struggled in the second half of 2023 when expectations of a "soft landing" dominated.

Kevin Gordon, Senior Investment Strategist at Charles Schwab, stated: "In recent weeks, investors have realized that they were too aggressive on defensive stocks last year. Essential consumer goods declined in the first year of this bull market, consistent with the recent broadening rebound in the stock market."