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The economy isn't recession-proof. It often follows a somewhat predictable, if irregular, pattern known as the economic cycle. Periods of expansion can often last for years before hitting a peak. What follows is a period of contraction -- a recession -- before the economy enters a trough ahead of the next expansion.
Recessionary periods can be brutal for investors. Stock market corrections and bear markets commonly occur during the contraction phase. Cyclical stocks -- companies in industries highly sensitive to the economic cycle -- are often the hardest hit during a recession.
However, some stock market sectors are relatively immune to the ups and downs of the economic cycle. They offer investors somewhat recession-proof stocks that they can hold when economic turbulence arises. That's evidenced by the fact that many companies in these sectors have increased their dividends every year for the past few decades, which included several notable recessions. Here's a closer look at where to invest if you're worried that the economy is about to hit a rough patch.
Several industries tend to experience relatively steady demand in both good times and bad. That makes them fairly recession-resistant (although no industry can be accurately labeled 100% "recession-proof"). These industries include:
Healthcare stocks tend to be relatively recession-resistant. People can't defer most healthcare spending. When you're sick, you need to see a doctor and buy medicine. Some examples of companies in the healthcare industry that tend to do well in recessions are:
People need to eat even when the economy hits a rough patch. However, consumers tend to shift their eating habits from dining at restaurants to preparing more food at home. Grocery stores and packaged food makers tend to be highly recession-resistant. Likewise, other consumer staples, such as household and personal products, tend to experience stable demand in recessions.
Some examples of recession-resistant companies that manufacture or sell consumer staples are:
Even when businesses close and people lose their jobs during recessions, demand for electricity, water, waste collection, and natural gas remains relatively stable. Utilities and utility-like companies generate reasonably consistent earnings throughout recessions. Some examples of utility-type companies include:
Consumers tend to spend carefully during recessions. Many people begin buying less-expensive items. They also typically eliminate optional expenses, such as paying professionals to take care of routine home and car maintenance. Instead, they usually spend more money at dollar stores, home improvement centers, discount retailers, and auto parts stores. Some examples of retail companies that typically benefit from recessions include:
Recessions are inevitable, so investors should construct truly diversified portfolios to weather downturns. The key to creating a diversified portfolio is investing in companies across multiple sectors, including recession-resistant ones.
Any diversified portfolio should include a mix of financially strong blue chip stocks with the financial fortitude to withstand a recession. Blue chip stocks are attractive to investors during recessions because they typically pay dividends, providing them with a tangible return in the form of income. Blue chip stocks in recession-resistant industries tend to be especially stable, which can help lessen the blow of a market sell-off from a recession.
The hottest stocks in recent years have been in the technology and communications industries. Many investors found it easy to build a portfolio that skewed toward these growth-focused sectors by buying stocks related to megatrends such as 5G, streaming services, cloud computing, social media, and artificial intelligence (AI).
Unfortunately, these sectors are not immune to a recession. An economic slowdown could cause businesses to reduce capital spending, which might cause them to cut back on expensive upgrades to 5G or cloud computing. Companies also tend to pull back on advertising during recessions, hurting ad-driven sectors such as social media and some streaming services. As previously noted, consumers tend to eliminate extra costs during recessions, which can affect streaming services and other entertainment options.
That's why it's important to diversify your portfolio to better withstand a recession by adding some defensive or countercyclical stocks in the consumer staples, utilities, bargain retailing, and healthcare industries. Doing so can help your portfolio blunt some of the potential negative impacts of a recession.
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