Recession fears seem exaggerated. 3 stocks to buy now

Recession fears have plagued the stock market for much of the past few years.

The 2022 bear market was based in part on the idea that the economy was headed for a recession as interest rates rose. More recently, economic pessimism has weighed on some sectors of the stock market, even as the broader market has peaked in enthusiasm for all things artificial intelligence (AI).

However, investors continue to receive reminders that the economy remains resilient. Federal Reserve Chairman Jerome Powell said this in recent comments, even though the Federal Reserve just cut interest rates by 50 basis points.

Now, investors have just been reminded that the US economy remains robust as September’s jobs report blew away expectations. The economy added 254,000 jobs, well above consensus expectations of 150,000. The unemployment rate also fell from 4.2 percent in August to 4.1 percent, and wages rose 4 percent, easily outpacing inflation.

Economists praised the numbers, with Chicago Fed President Austan Goolsbee saying, “You really couldn’t realistically ask for a better report for the economy.” The one-month employment report is just one data point, but it lends credence to the case that the economy remains on track for a soft landing, even as some businesses are still grappling with the after-effects of earlier increases in consumer prices.

In other words, a recovering economy could cause a number of stocks to bounce back. Keep reading to see some of them.

Image source: Getty Images.

1. Dollar General

general dollar (DG 2.97%) shares have been reduced over the past two years as sales growth has slowed and profits have fallen.

The company’s customer base, which is largely made up of households earning $35,000 a year or less, has clearly been hurt by high inflation. Sales of its more discretionary items, such as home goods and apparel, fell, even as consumables sales rose. Management also noticed a pattern of slowing sales at the end of the month, a sign that customers’ budgets were drying up.

Given that pattern, news of a 4% wage increase looks especially good for Dollar General. Like most retailers, Dollar General has a lot of leverage in its business, and a change of a few percentage points can make a big difference in the bottom line.

In a stronger economy, Dollar General should see profits start to rebound, and the stock looks cheap at a price-to-earnings (P/E) ratio of just 13. The stock also reacted positively to news of the seats ratio of labor, up 2.7 percent in late Friday trading.

2. Target

Unlike its multi-category retail peers Walmart and Costco Wholesale, Aim (TGT 2.19%) has struggled in recent years. A big part of the reason is that it depends much more on discretionary sales than its two competitors.

Walmart and Costco bring in most of its revenue from groceries, while Target relies on things like apparel, electronics and home goods to drive most of its business. People tend to cut back on spending in those categories when times are tough.

The combination of a strong economy, higher wages and falling interest rates should be a boon for Target, as it will give people more money and encourage spending on discretionary items such as home goods, toys and electronics.

Target stock currently trades at a P/E ratio of 16 and should have plenty of upside ahead if it can improve top-line growth and expand its margins. The stock is still down 43% from its 2021 peak.

3. Five below

Few retailers are as sensitive to consumer confidence and discretionary demand as Five below (FIVE 5.04%). The discount retailer specializes in products such as toys, games, accessories and beauty products that typically retail for $5 or less. The mall store is popular with teenagers and those looking for a cheap impulse buy or basic gift.

As you might expect in the current economic environment, Five Below struggled, with comparable sales falling 5.7% in the second quarter. Adjusted earnings per share fell from $0.84 to $0.54.

Management noted the macro pressures in the recent report and is adjusting its product mix to meet the challenging times. However, more discretionary consumer income would likely help the business return to comparable sales growth and boost its margins.

If wage growth continues to outpace inflation and interest rates fall, Five Below looks like a good candidate for recovery. In fact, the stock rose 5% on Friday after the jobs report. It is still down more than 50% this year, meaning there is plenty of room for recovery if the macroeconomic outlook changes.