When the curtain closes on 2020, there's little doubt it'll find its way into the history books for its wild volatility. In a roughly six-month span, we witnessed the steepest bear market decline of at least 30% in history, as well as the most ferocious rebound from a bear market bottom on record. Many of the stock market's biggest nominal single-day gains and losses have been set since February.
But even with the benchmark S&P 500 completely retracing its coronavirus disease 2019 (COVID-19) losses, the potential for another stock market crash remains high. Fundamentally, mortgage and auto loan delinquencies are rising, the unemployment and underemployment rates remain well above historical norms, and there's no telling if or when we'll have a workable coronavirus vaccine.
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Additionally, historical data suggests a correction or crash is inevitable. In the eight previous bear market declines (dating back 60 years), there were 13 pullbacks in total, ranging between 10% and 19.9% within three years of hitting bottom. Many of these retracements occurred well before the three-year mark.
In other words, investors should be on guard for the very real possibility of another stock market crash.
Yet, as we learned in 2020 and during every previous bear market decline or crash, long-term investors shouldn't fear the rug being pulled out from underneath Wall Street. Since bull market rallies have eventually wiped away each and every correction, any significant downside in the stock market is simply an opportunity for investors to go shopping for high-quality stocks at bargain prices.
The question is: What to buy?
Rather than steer you to specific stocks, allow me to point you in the direction of three very specific sectors that have all the intangibles needed to thrive during a stock market crash.
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Healthcare
Arguably the most exciting sector during a stock market crash is healthcare.
Think about it this way: We don't get to choose when we get sick or what ailments we develop, and our bodies don't care if the economy is booming or in a recession. This means drugmakers, medical device companies, health insurers, hospitals, and specialty healthcare services are going to see relatively consistent demand and cash flow no matter what's happening with the stock market or the U.S. economy. An initial dip in healthcare stocks is often a no-brainer opportunity for investors to buy in on the cheap.
Take Alexion Pharmaceuticals (ALXN) as the perfect example. Alexion is an ultra-rare disease drug developer, meaning that it caters to very small groups of patients. When it successfully develops a drug for an ultra-rare indication, it often faces little or no competition and receives virtually no pushback from insurance companies on its list price.
If a stock market crash or recession occurs, it doesn't mean Alexion's patients stop needing their game-changing therapy. Just as Alexion saw its sales soar during the Great Recession, its sales growth is expected to remain in the double digits for the foreseeable future, despite the coronavirus pandemic.
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Consumer staples
As the theme of this list suggests, basic-need goods and services are smart buys during periods of heightened volatility and uncertainty. That's why consumer staples should be on your radar.
As the name implies, a consumer staple is a good you purchase no matter how well or poorly the economy is performing. For instance, you need to eat, buy detergent, and have toilet paper no matter what the economy is doing. This means consumer staples stocks, while boring, can be beautiful businesses to own during a stock market crash.
For example, discount retailer Dollar General (DG 0.25%), which offers consumable, seasonal, and discretionary products, hasn't had a down year for sales since 1987. Every year, like clockwork, Dollar General's top-line sales grow from the previous year. Carrying an assortment of food, paper, personal, and hygiene products makes Dollar General stores a must-visit regardless of how well or poorly the economy is performing.
Dollar General has also done an excellent job of appealing to residents in smaller towns, as well as attracting well-to-do consumers with brand-name merchandise. There's no doubt that its discount pricing is what brings in customers. But Dollar General's impressive sales growth streak speaks to its ability to move beyond just price as an attraction.
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Utilities
Have I mentioned the importance of basic-need goods and services yet? The utilities sector can also buoy your returns during a stock market crash. Note that utilities can include electric, natural gas, or water.
Buying into the seemingly boring utilities sector lets you take advantage of our rarely changing demand for electricity, natural gas, and water. Although climatological changes like drought can affect water usage, a stock market crash or a weak U.S. economy are unlikely to have much if any impact on how people consume these products.
While I could pull pretty much any utility out of the hat to prove my point, I think it's prudent to highlight small-cap water and wastewater utility York Water (YORW 0.41%) here. The beauty of most utility businesses is that they're regulated by public state commissions -- in York's case, Pennsylvania's public utility commission. Though this regulation doesn't allow York to pass along price hikes at will, it also means no exposure to potentially volatile wholesale pricing. In other words, utilities have highly predictable and transparent cash flow, which is a big reason York's revenue hasn't declined in about at least a quarter of a century.
Consistent demand and a history of conservative acquisitions in Pennsylvania have allowed the under-the-radar York Water to be the stock market's most distinguished dividend payer. Its 1.7% yield may not be all that special, but this company has been paying a dividend to its shareholders for 204 consecutive years. That's more than six decades longer than the next-closest public company.
The boring utility sector can pay big benefits during a stock market crash.
