Will the US enter a recession? Wall Street may be deeply divided on that, but Bank of America believes the economy has melded into one. The investment banker reveals how to trade in recessions, to name a few stocks whose attributes have performed in previous recessions. The bank thinks the US is in a “mild” recession “starting now” and expects the economy to record QoQ gross domestic product growth from 1Q2022 to 1Q2023. Against this backdrop, the bank is doubling down on small-cap stocks to deal with the macro challenges plaguing the economy. “We think [small cap] Risks are largely discounted and small cap pools are better positioned to weather today’s backdrop of higher inflation over the long term, de-globalisation, risks to Covid beneficiaries ( big growth stocks) and geopolitical risks,” Bank of America strategist, led by Jill Carey Hall, said on July 15. Small-cap stocks have historically performed well. than larger-cap stocks in a stagnant inflation environment, he added, noting that guidance from small-cap companies is also “above average and improving.” The recent 32% peak-to-trough decline in the small-cap-focused Russell 2000 index has represented more than 80% of the index’s average declines in previous recessions – which means the limit. The bank’s research also shows that the index looks oversold in price-to-earnings (P/E) terms compared to recessions. before. On a P/E basis, the index is expected to drop another 5% to 15% for the Russell 2000, compared with 15% to 20% for its ad-based S&P 500 cousin. Read more Morgan Stanley says these global stocks are set to boost earnings – and up more than 45% These ‘food chain top’ stocks are the best names you can buy, a home Morningstar analysis reveals stock is cheap at ‘overvalued’ oil sector – and thinks one is ‘a bargain’ Stock picks But Bank of America also warns investors to be selective about with small-cap stocks. The bank sifted through the Russell 2000 and Russell Midcap Index to identify stocks with specific attributes that have performed better in past recessions: high quality, low risk, and a record of cash returns. for shareholders. Stocks that appeared on the bank’s screens included auto parts retailer O’Reilly Automotive, Hershey, Ohio-based healthcare company Chemed Corp, electronic components maker Amphenol Corp. and packaging manufacturer Avery Dennison.