Federal Reserve Chairman Jerome Powell's decision to continue ramping up interest rates in order to curtail inflation is setting off alarm bells across Wall Street. Since Powell's commentary last Friday, the SPDR S&P Biotech ETF and the Technology Select Sector SPDR Fund have both lost over 2.2% of their value.
What's important to understand is that these two innovation-oriented exchange-traded funds are key indicators of investors' appetite for risk. Prior to this sudden downturn, the SPDR S&P Biotech ETF and the Technology Select Sector SPDR Fund were both up by double-digits since the start of July, as bargain hunters scoured the market for deals on the belief that the worst of the 2022 bear market had passed.
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Powell's remarks, however, sent bottom fishers back into hiding over fears that a Volcker-style recession may be on the horizon. The Volcker recession refers to the period covering July 1981 to November 1982 when the U.S. economy dipped into a prolonged economic downturn as the result of Paul Volcker -- the Federal Reserve chairman at the time -- making a series of aggressive interest rate hikes in response to record-setting levels of inflation.
While slowing economic growth and rising interest rates aren't the end of the world, investors are growing increasingly concerned about the possible ramifications from these dual headwinds. Volcker's strict monetary policies, after all, are widely considered to be the cause of 1982's nearly 11% unemployment level.
The big deal is that unemployment, consumer spending, and corporate earnings are all linked via a positive feedback loop. In short, rising levels of unemployment lead to less consumer spending, which ultimately shrinks corporate profits.
Now, the 2022 bear market has so far centered on global supply chain issues, overhangs from the COVID-19 pandemic, geopolitical turmoil, and skyrocketing levels of inflation. But Powell's insistence on tamping down inflation via interest rate hikes could cause history to repeat itself (i.e., higher levels of unemployment leading to slimmer corporate profits).
Fortunately, there are a handful of safe haven stocks that investors can rely on to weather such an economic downturn. Amazon (AMZN -1.65%), DexCom (DXCM 0.10%), and Johnson & Johnson (NYSE: JNJ) are three must-own stocks in the event the Federal Reserve's tighter monetary policies push the U.S. economy into a Volcker-like recession. Here's why.
Amazon: A pivot to price
The e-commerce titan Amazon is one stock that ought to shine in a recession. As household budgets contract, consumers will undoubtedly become laser-focused on prices. Its no secret that Amazon, through its state-of-the-art supply chain and logistics platform, has been able to crush most of its competitors from a pricing standpoint for the better part of the last two decades.
While Walmart has been able to close the gap to a degree by developing a virtual storefront of its own, and the online pet supply retailer Chewy is competitive with Amazon in terms of pricing within its particular field, Amazon's flagship Prime membership subscription service gives it a nearly insurmountable advantage over its peer group. Amazon Prime membership keeps consumers locked into its ecosystem by offering faster and cheaper shipping on a variety of items, access to a galaxy of streaming content, and marketing campaigns tailored to individual consumers.
In sum, Amazon's first class e-commerce ecosystem should prove to be a big hit with consumers in a more cost-conscious world.
DexCom: A fundamental diabetes platform
Over 11% of the U.S. population currently has diabetes, according to a report by the Centers for Disease Control (CDC). What's more, the CDC estimates that a whopping 38% of U.S. adults presently have prediabetes.
As a direct result of these staggering incident rates, the diabetes care market is one of the fasting-growing spaces within all of healthcare. Continuous glucose monitor (CGM) sales, for instance, are expected to rise at a compound annual growth rate of 27.3% over the period from 2019 to 2026, per a market analysis by Research and Markets.
These favorable market dynamics make DexCom a must-own stock right now. DexCom sports one of the best-selling CGM franchises in the market today. While the company's stock is trading at over 100 times forward-looking earnings at current levels, this rich premium is arguably well deserved. After all, DexCom's stock may actually be trading at as little as 2.6 times 2026 sales, thanks to this blistering growth rate across the CGM landscape as a whole.
What makes DexCom a particularly strong stock to own in a recessionary environment? DexCom's CGM devices are a fundamental part of the diabetes management landscape. An economic downturn isn't going to change this fact. As a result, the medical device company ought to be able to easily weather even a severe economic recession.
