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Investors fear that the risks of recession are increasing in the United States. In Europe, they fear economies will also stagnate as inflation soars, leading to the toxic combination known as “stagflation”.
This encourages Wall Street to buy back defensive stocks that have historically performed well even in difficult circumstances.
Health care companies in the S&P 500 rose 3.8% in April, while the broader index fell 0.7%. The utilities sector climbed 3.1% and companies that manufacture basic consumer goods like food and hygiene products rose 3.6%.
In Europe, healthcare companies in the benchmark STOXX 600 index are up 6% this month, while the broader index is only 1% higher. Utilities rose 3.5% in April.
“Given the high levels of uncertainty, we recommend investors add hedges, including defensive sectors such as global health care,” UBS Global Wealth Management strategists told clients this week.
Pfizer (PFE) was one of the best performing stocks in the United States on Thursday after announcing it was buying ReViral, which is developing drugs to treat a common respiratory virus. Shares of Pfizer (PFE) rose 4% and are now up nearly 7% this month.
Healthcare is also the preferred defensive choice of Citi strategists. They said revenue from Covid-19 vaccines and treatments, along with a “continued need for recalls”, will continue to support companies in the sector, and that industry mergers are expected to intensify.
Traders aren’t in full fear mode like they were a month ago, but there is enough uncertainty about the outlook to inspire some degree of caution.
Why play defense? In Europe, as the war in Ukraine continues, there is a growing consensus that skyrocketing energy prices will wreak havoc on the region’s economy.
“If energy prices were to return to early March highs and stay there, the eurozone could slide into recession,” said Simon Wells, chief economist for Europe at HSBC. “Stagflation is a real risk.”
In the United States, Deutsche Bank predicts a recession next year as the Federal Reserve withdraws its support for the economy in an effort to limit inflation. On Friday, Michael Hartnett, chief investment strategist at Bank of America, said he believed a “recessionary shock” was coming to markets.
Wall Street is currently locked in a debate over whether anxiety about the economy is fully reflected in stock prices. Otherwise, defensive stocks may continue to outperform.
China’s unwavering commitment to stamping out Covid by locking down major cities such as Shanghai threatens to cause a major shock to its vast economy, put more strain on global supply chains and fuel further inflation.
The latest: Shanghai – home to China’s main financial center and some of its largest seaports and airports – has been under lockdown for 12 days, and there are no signs that restrictions will be lifted soon, reports Laura He, ma colleague from CNN Business.
Small businesses have been hit hard, with shops and restaurants forced to close. Tesla, as well as many Chinese manufacturers, do not know when they will be able to restart their factories. Meanwhile, port delays are getting worse and air freight rates are skyrocketing, putting even more pressure on global trade.
The tight restrictions have dispelled any expectation that the country might relax its zero-tolerance approach to Covid-19.
“The spike in cases in Shanghai has convinced senior leaders that there is no middle ground between zero-Covid and living with Covid. Going forward, instant lockdown may be the dominant strategy,” Larry Hu, chief Greater China economist at Macquarie, said in a research report this week.
President Xi Jinping has vowed to ‘minimize’ the economic impact of his Covid policy, but the deteriorating situation in Shanghai – and the prolonged lockdown – raises tough questions about Beijing’s approach to coronavirus outbreaks. Omicron, a much more infectious variant of the original virus.
“The Omicron variant is highly contagious, and it has become increasingly difficult for China to achieve its ‘zero-Covid’ goals while most other countries are opting for a ‘living with Covid’ approach,” Ting Lu , managing director and chief China economist for Nomura, wrote in a research note.
He believes rising cases in China and escalating lockdowns in Shanghai and several other cities will suppress activity across a wide range of sectors, including in-person services, travel, logistics, construction and some manufacturing industries.
“The economic costs could be staggering,” Lu said, adding that global investors may “underestimate” the impact of China’s zero-Covid policy on its economy and markets.
The Biden administration’s decision to extend a pause in federal student loan repayments through the end of August has been cause for celebration for 43 million Americans.
Not so much for fintech company SoFi, whose shares plunged Thursday, reports my CNN Business colleague Paul R. La Monica.
SoFi offers private student loans and refinances to undergraduate students and their parents, as well as graduate students.
That means the White House’s decision to extend its payment moratorium this week will affect its sales and earnings, the company said.
And SoFi doesn’t expect the situation to change anytime soon, pointing to the midterm elections in the fall. He said he believed the hiatus would be extended again and remain in place through 2022.
He now expects revenue of around $100 million this year. Its previous forecast was for a profit of $180 million.
That said: extending the moratorium could help the broader stock market if it strengthens the US economy. While the pause costs the U.S. government about $4 billion a month, it provides debt relief equivalent to an average of $5,500 per borrower, according to recent analysis by the nonprofit Committee for a Responsible Federal Budget.
India’s central bank announces its latest policy decision.
Coming next week: US inflation data for March could fuel debate over how aggressive the Federal Reserve is and whether the central bank could tip the economy into a recession.