By Paul R. La Monica

One quarter of negative economic growth doesn't make a recession, for sure. But investors are clearly a lot more nervous about the possibility of a downturn, or stagflation at the very least, after the surprise drop in GDP.

So what should those jittery investors do? If the gross domestic product keeps sliding, many companies -- probably most -- will cut earnings outlooks. Then what?

For Wall Streeters, it's time to play defense.

Nicole Inui, HSBC Global Research's chief strategist for the Americas, thinks the market will "flip-flop" between recession and stagflation fears until the Trump tariffs get sorted out.

And investors will be looking for signs that inflation is backing off and the Federal Reserve is ready to start cutting interest rates again.

For Inui, consumer staples, healthcare, and utilities -- all high-dividend yielding sectors -- are plays for a recession. They've outperformed in previous ones. Healthcare does well when stagflation raises its ugly head, as does commodities.

And the area to avoid: consumer discretionary stocks. Inui surmises that will be the case because of tariffs, which can drag down consumer spending and, in turn, retailers' sales and earnings.

Investors are already bracing for a tough economic go. Coca-Cola, a consumer staple, is the top stock in the Dow Jones Industrial Average. In the second spot is biotech Amgen, which if not truly in the healthcare sector is certainly tied to healthcare. Also leading the Dow are other defensives, such as Verizon, McDonald's and Johnson & Johnson.

Larry Adam, chief investment officer with Raymond James, expects healthcare names to keep going strong.

"My favorite sector is healthcare," Adam told Barron's. "It's a sleeper that has both offensive and defensive characteristics."

Earnings growth should be strong for many healthcare companies, Adam said, and the sector is less volatile and is known for relatively high dividends.

Adam also likes the industrials sector because of reshoring efforts, all part of the Trump Administration's America First economic and manufacturing agenda.

Jake Seltz, manager of the Allspring LT Large Growth exchange-traded fund, is also a fan of healthcare and industrial stocks.

In an interview, Seltz told Barron's that healthcare is "growthy but defensive."

But the fund manager suggested that investors pick their spots because of tariff worries and possible regulatory crackdowns by Robert F. Kennedy Jr., who heads the Health and Human Services Department.

Seltz singled out medical technology companies like robotic surgery firm Intuitive Surgical and equipment giant Boston Scientific as solid plays. His ETF holds both.

"Since Covid, there has been a rebound in patient demand at hospitals. There has been more testing, diagnostics and procedures," Seltz said. "Medtechs are also more immune to pricing and regulatory risks. There is still some tariff risk but they are safer havens."

As for the industrial sector, Seltz thinks investors should focus on trends -- logistics and artificial intelligence infrastructure, for instance. His fund owns XPO, a freight trucking company that reported better-than-expected earnings on Wednesday, as well as Vertiv, a company that provides liquid-cooling services to data centers and has a partnership with Nvidia.

But both Seltz and Adam also said investors should consider scooping up names in the tech sector, which has been crushed in this selloff. They could do well in either a recession or a slowdown. Plus, valuations are down and earnings growth is still expected to be higher than the rest of the market.

HSBC's Inui is warming to tech, especially if weaker economic data prompts the Fed to resume rate cuts after a pause so far this year.

Inui wrote: Anything that "opens the door for Fed cuts and/or moves to de-escalate the trade turmoil would signal a shift to an offensive approach." That means growth stocks like tech and economic proxies such as financials.

OK, but what if investors just can't manage their recession nerves?

They should consider so-called low volatility funds -- or the stocks that many of those funds own. So-called low vol ETFs are designed to go down a lot less during market pullbacks.

"Investors -- particularly those with shorter time horizons or lower risk tolerances -- may be best suited looking to the low volatility factor to help filter out market turmoil," said analysts at BlackRock, which runs the iShares Edge MSCI Min Vol USA ETF.

The top holding in that ETF might be the king of safe haven investing: Warren Buffett's Berkshire Hathaway. Berkshire is up 17% this year in a down market.

Recession or stagflation, there are plenty of options out there for tough economic times. Take note.

Write to Paul R. La Monica at paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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April 30, 2025 14:53 ET (18:53 GMT)

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