Q: Many experts say that a recession is likely within the next year or two. Are there any stocks that could actually do well if this were to happen?
First of all, there are no stocks that are guaranteed to perform well in a recession. It depends on the root causes of the recession itself, how deep and long-lasting the economic slump is, and a number of other factors. That said, there are a few general guidelines for which stocks tend to perform well.
For starters, companies that sell items people need at a discounted price usually do OK. Think big-box discounters, dollar stores, and discounted clothing retailers. As an example, Wal-Mart was actually up 18% in 2008 while the Great Recession caused a 39% plunge in the S&P 500. Dollar Tree did even better, gaining more than 60% that year.
In addition, mature companies that have strong competitive advantages such as scale and brand strength also tend to do better than most, especially if they produce essential products. Think companies like Colgate-Palmolive or Johnson & Johnson. And finally, utilities are about the most recession-resistant business there is, so those tend to perform well during tough economic periods.
As a final point, it's important to note that stocks generally don't do too bad in recessions. Since the mid-1950s, the average stock market return during recessions is negative 1.5%. Not good, but certainly not wealth-destroying. And the market tends to perform very well in the years that follow. The point is that although these types of stocks tend to do well during a recession, that doesn't necessarily mean that you should sell other stocks you own to buy them.
