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These 3 Stocks Are Safe Bets in the Event of a Market Crash

With the economy still working to recover from its pandemic-driven slump, the thought of a market crash may not seem as likely. For instance, the Atlanta Fed GDP Now model estimates that the economy grew at 5.1% in the fourth quarter. Inflation is rising, but wages are as well.

That said, the Federal Reserve is poised to raise interest rates, and an old market saw is "Don't Fight The Fed." This means that stock investors should be cautious when the Fed is raising rates. It also means that certain market sectors are going to take a hit, even if the full market doesn't actually crash. If we do see a market crash, here are three names that should be on the shopping list in the aftermath.

Image source: Getty Images.

1. Realty Income benefits from a defensive client base

Realty Income (NYSE: O) is a classic defensive stock that will perform well in a slow economy. For instance, Realty Income was one of the few real estate investment trusts (REITs) that actually raised its dividend during the depths of the COVID-19 pandemic.

Realty Income is a REIT that develops single-tenant properties and leases them to companies in highly stable industries. Its ideal tenants are drug stores, dollar stores, and convenience stores. During the pandemic, most of Realty Income's tenants were considered essential businesses and permitted to stay open. This tenant stability is a characteristic of defensive industries in general -- even if the economy is struggling, people still buy medicine, soft drinks, and gasoline.

Realty Income is a Dividend Aristocrat, which means it has a long record of annual dividend increases. Realty Income has been around since the 1960s, so it has seen recessions and market crashes before. Realty Income should be a staple of an income investor's portfolio.

2. AGNC Investment will benefit from a flight to safety

AGNC Investment (NASDAQ: AGNC) is a mortgage REIT, which means it has a different business model than Realty Income. Realty Income buys buildings and rents them out. AGNC doesn't buy buildings, it buys real estate debt -- in other words, mortgages. It specializes in mortgage-backed securities which are guaranteed by the U.S. Government.

With inflation rising, and the Federal Reserve on the verge of raising interest rates, AGNC is a tough stock to love. Rising rates, along with a reversal of some COVID-19-driven policies, will be a negative for the stock. That said, all of that goes out the window if the market crashes.

In a market crash, investors generally sell assets that are sensitive to the economy and rotate into safer assets. AGNC Investment's portfolio of government-guaranteed mortgage-backed securities fit that bill. If the market crashes, the Fed will probably pause any further rate increases and wait to see how the economic data reacts. AGNC is more of a counter-cyclical stock, which means it performs best when the economy struggles. This is why it would be a good purchase in the event of a crash.

3. Duke Energy: People still need gas and electricity in a recession

Duke Energy (NYSE: DUK) provides gas and electric power to a number of Southeastern and Midwestern states. Duke is a regulated utility, which is an example of the classic defensive stock. Utilities are highly stable and provide good income, which is why they have always been considered great for retirees. When the economy struggles, people may forego shopping at the mall, but they will still want heat and electricity. In addition, Duke will benefit from the fact that it is highly regulated.

Regulation for a public utility means that it is somewhat insulated from competition, and in exchange it agrees to let the state government set the price it charges consumers. The state public utility commission will ensure that the utility doesn't price-gouge. However, it will also ensure that the company earns enough to provide sufficient customer service. Duke Energy will probably outperform in the event of a crash, and will be one of the first to recover as investors dump cyclical stocks for defensive stocks.

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*Stock Advisor returns as of January 10, 2022

Brent Nyitray, CFA has no positions in the stocks mentioned. The Motley Fool recommends Duke Energy. The Motley Fool has a disclosure policy.


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