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Where the Recession Will Hit Hardest

By Selena Maranjian - Updated Apr 5, 2017 at 8:04PM

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Just how much pain will affected companies feel?

When bears prowl Wall Street, investors start dividing companies into two important categories, based on their odds of survival.

Defensive industries can mostly shrug off economic downturns, even if the country's officially in a recession. Medicine, electricity and gas, and even beer -- liquid comfort for the suffering masses -- are classic examples of defensive companies. Think Merck (NYSE:MRK), National Grid (NYSE:NGG), or Philip Morris International (NYSE:PM).

Non-defensive industries aren't so lucky. These cyclical businesses tend to manufacture the sort of things that cash-strapped and future-fearing consumers will put off buying: appliances, cars, and other higher-end items. Think Whirlpool (NYSE:WHR), Ford (NYSE:F), and even Dell (NASDAQ:DELL) -- both companies and individuals will often resist the urge to upgrade when money's tight.

We know these cyclical firms will likely suffer in the coming months -- but how badly? The pollsters at HarrisInteractive recently released survey results showing that:

  • 58% of Americans feel the financial condition of their household is worse than it was a year ago, and 33% expect it to deteriorate further in the coming six months.
  • Nearly two-thirds of Americans expect to cut back on their spending at restaurants and on entertainment. Some 71% won't be leaving home for a vacation of more than a week.
  • The vast majority of Americans don't expect to buy large-ticket items in the next six months, including a new computer (78%), a vehicle (88%), a new home (90%), or a boat or RV (95%).  

How bad is it, really?
While those numbers help flesh out the picture, they still don't give enough context. If 78% of Americans are not planning on buying a new computer soon, is that a much higher percentage than usual? When hunting for this information, be careful to compare apples to apples. One survey may count individuals, and another households; one might ask about the next six months and another the next year. Your best option is to find survey results that compare a given set of figures with those from previous years.

For example, here are some striking numbers from a very recent survey of corporate spending plans for information technology (IT). According to ChangeWave, many businesses have spent less than they expected so far this quarter on technology, and more businesses than ever plan to cut their IT spending next quarter. That's particularly bad news for manufacturers of IT gear, since businesses have historically used the beginning of the year to make more new purchases. Investors, beware!

Survive the bear's attack
Recessions are rough on everyone, investors included. But you can prevent a lot of needless damage to your portfolio by paying close attention to which companies are best positioned to take their lumps and come out stronger, and which are simply cruising for a bruising.

Looking for pointers toward promising companies and stocks? Try our Motley Fool Stock Advisor newsletter. Even in this environment, its picks have been soundly beating the market. A free 30-day look is yours for the asking.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. National Grid is a Motley Fool Income Investor selection. Dell is a Motley Fool Inside Value pick. Staples is a Motley Fool Stock Advisor recommendation. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.

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Stocks Mentioned

Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
$89.19 (-0.37%) $0.33
Ford Motor Company Stock Quote
Ford Motor Company
$15.50 (3.06%) $0.46
Dell Technologies Inc. Stock Quote
Dell Technologies Inc.
Whirlpool Corporation Stock Quote
Whirlpool Corporation
$166.64 (5.00%) $7.94
National Grid plc Stock Quote
National Grid plc
$70.24 (0.23%) $0.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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