Key Takeaways

  • There is increased talk of a potential recession in the cards over the next 12 months
  • Periods of negative economic growth can create a challenging environment for some companies, while others can appear almost immune
  • Johnson & Johnson (JNJ) is often considered a ‘safe haven’ investment during recessions

There’s a lot of talk of a U.S. economic recession at the moment. Depending on who you ask, it ranges from a certainty to pretty unlikely, but it’s a heated debate. Companies are racing to keep pace with rising prices all along their supply chain, a tight labor market, the war in Ukraine, and seemingly never-ending political issues.

Consumer behavior isn’t helping in many industries. After two years in lockdown, analysts had been rightly concerned over the U.S. tech sector in the short term, with everyone spending less time at home in front of the TV and computer. Companies like Netflix and Meta have been hit hard in 2022, with Netflix losing subscribers for the first time in over a decade and Facebook losing users for the first time in its history.

Movements in the economy don’t always correlate to movements in the stock market, but a recession isn’t likely to be considered good news for many companies. With that said, some are positioned to hold up well during times of economic turmoil.

With a history going back to 1886, Johnson & Johnson (JNJ) sits in stark contrast to the Silicon Valley giants that dominate the S&P 500 today. With such a long track record, JNJ has seen its fair share of recessions. So is the old hand bomb proof, or could it be different next time?

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What constitutes a recession?

Before we get into Johnson & Johnson specifically, let’s clarify exactly what a recession is. The definition is widely considered to be two consecutive periods of negative GDP (economic growth), but this is actually outdated.

These days, the National Bureau of Economic Research (NBER) decides when the country has gone into recession by looking at a range of different statistics. While negative GDP growth is still a significant factor, they also consider other data points like employment figures, retail sales and industrial production.

Data like this is often available monthly, which means that the NBER can announce a recession much sooner than the six months it takes to experience two negative GDP quarters, plus the time needed to assess output.

This updated definition has been particularly relevant recently. After the initial outbreak of the Covid-19 pandemic, the NEBR announced a recession in February 2020. It turned out to be the shortest recession in history, with the NEBR declaring it over just two months later. Using the old definition, we never would have gone into recession at all.

We’re not in a recession right now, but with negative GDP growth last quarter, there are some murmurings that we could be headed that way. We covered this topic in more detail a few days ago when we looked at how the economy is doing so far in 2022.

There are many reasons an economy can fall into a recession. Still, to break it down to its fundamental concept, it’s when consumer spending goes down. When people spend less money on goods and services, companies that provide them experience a drop in their revenue.

This drop in demand has an effect on the companies that provide materials or expertise anywhere along the supply chain. If demand for new cars goes down, it’s not just the automakers that suffer. So do companies that make the tires, the fabric for the seats and all of the other components that go into a new car.

Declining company revenues can lead to workers being laid off and wages stagnating or falling, which further exacerbates the problem because workers now have even less money to spend.

Obviously, not every recession is the same, and there will be different factors that start them and various different industries impacted. With that said, there are definite similarities and trends across most recessions, which can lead to insights on investments that could be attractive bets if a recession hits.

JNJ is often considered to be one of them.

The Johnson & Johnson business explained

Johnson & Johnson is a behemoth of a company. They generated $93 billion in revenue in 2021, placing them at number 36 on the Fortune 500 list based on total revenue. They regularly claim a spot in the top ten most valuable companies in the world by market cap, and they have a AAA credit rating, the same as the U.S. government.

They generate this revenue from a range of different areas. When Johnson & Johnson started in 1886, they created a range of sterile plasters and medical dressings for doctors and surgeons. Over the next 130+ years, JNJ expanded its product range to a point where they now develop and sell pharmaceuticals, medical devices and health and beauty products.

Some prominent brand names owned by JNJ include Johnson’s Baby, Neutrogena, Tylenol, Band-Aid, Listerine, Aveeno, Rogaine, and Nicorette. JNJ also develops drugs for conditions such as diabetes and prostate cancer and gained significant press coverage over the past two years as one of the developers of a vaccine for Covid-19.

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So JNJ is massive and well-diversified, but it’s not the size of a company that dictates how it is likely to hold up during a recession. After all, the list of the largest companies in the world contains big names that have seen their share prices tumble over the past few months, in line with falling economic growth. Notable examples include Apple, Alphabet, Tesla, and Microsoft.

Is Johnson & Johnson a good investment during a recession?

Johnson & Johnson’s business model lends itself to holding up well during a recession. Going back to the fundamental impact of a recession, consumer spending decreasing, we can draw some conclusions about how this could impact different businesses.

If money is tight for households, the first items to be taken off the shopping list will be luxuries and unnecessary items. Luxury consumer goods, entertainment and leisure and other discretionary spending can drop significantly. Fewer people will be in the market for a high-end handbag or a new car if the economy is tanking and they’re worried about losing their job.

Those same people will still buy Tylenol if they need it. They’ll still buy diapers, wipes and baby powder for their children and they’ll still get a scan at the hospital if the doctor tells them to. The demand for the products that Johnson & Johnson creates is very resistant to changes in the broader economy and they’re also primarily products that we need to keep on buying regularly.

This consistent level of demand, diversified product range, strong credit rating and exemplary track record have allowed Johnson & Johnson to build a reputation as a “safe haven” asset during a recession.

How has Johnson & Johnson performed during previous recessions?

That all sounds great in theory, but how has JNJ performed in practice? Has the business continued to prosper throughout the previous recessions they’ve been through? In short, yes it has.

During the 2008 financial crisis, the S&P 500 fell by 54%. Johnson & Johnson wasn’t wholly immune to the volatility but fared significantly better, with their share price falling 21% over the same period.

But it gets better. JNJ’s stock over this period could be considered collateral damage of the general move out of the stock market. Investors were more likely to be dumping their total portfolios rather than specifically selling JNJ. The reason to suggest this is because JNJ grew their earnings per share and net income every year throughout the 2008 crisis, from 2007 through to 2013.

Put simply, Johnson & Johnson continued to grow and prosper as a business through a period of economic devastation not seen since the Great Depression. Importantly for investors, this sustainability and stability has allowed Johnson & Johnson to increase its dividends for 60 consecutive years through to 2021. That’s almost unheard of.

How to protect your investments against a recession

So Johnson & Johnson appears to be a safe pair of hands when it comes to an economic downturn, but you can’t put all your investments into just one company. Well you can, but you probably shouldn’t.

If you’re concerned about an upcoming recession, we’ve recently released our Large Cap Kit. In an environment of low earnings and low growth, big companies tend to outperform small ones. With this Kit, we aim to take a long-short position to take advantage of this differential.

Lastly, if inflation is more of a worry for you, we’ve got our Inflation Kit. It holds assets that have the potential to perform well during periods of high inflation, such as treasuries with coupons that adjust to levels of inflation, precious metals and commodities.

Download Q.ai for iOS for more investing content and access to over a dozen AI-powered investment strategies. Start with just $100 and never pay fees or commissions.

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