The economy often follows a somewhat predictable, if irregular, pattern known as the economic cycle. Periods of expansion can often last years before hitting a peak. What follows is a period of contraction -- a recession -- before the economy enters a trough ahead of the next economic expansion.
Recessionary periods can be brutal for investors. Stock market corrections, bear markets, and stock market crashes commonly occur during the contraction phase. Cyclical stocks, which are those of 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 vagaries of the economic cycle. Here's a closer look at these recession-proof stocks.
Historically recession-resistant industries
Several industries tend to experience relatively steady demand in both good times and bad, making them fairly recession-resistant. These industries include:
Healthcare stocks tend to be relatively recession-proof because people can't defer most healthcare-related spending. When you're sick, you might need to see a doctor and buy medicine. Some examples of companies in the healthcare industry that tend to do well in recessions are:
- Johnson & Johnson (NYSE:JNJ): The iconic healthcare company makes well-known health-related household products such as Band-Aids and Tylenol, along with medical devices and pharmaceuticals, that benefit from stable demand.
- CVS Health (NYSE:CVS): This health company operates a leading drugstore chain, administers a large-scale pharmacy benefits program, and provides health insurance to many people.
- Pfizer (NYSE:PFE): Together with its operational partners, Pfizer makes some of the world's best-selling pharmaceutical drugs and vaccines covering a wide range of medical issues.
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 cooking more food at home. Because of that, 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:
- Kroger (NYSE:KR): Grocery stores such as Kroger, one of the country's largest supermarkets by revenue, tend to benefit from recessions as consumers cook more often at home.
- Pepsi (NASDAQ:PEP): As the maker of the well-known brands Pepsi, Tropicana, Quaker Oats, Aquafina, and more, all of which are found on grocery store shelves, Pepsi is well-positioned during recessions. Pepsi's sales tend to remain relatively stable during difficult times.
- Procter & Gamble (NYSE:PG): The household and personal products company sells familiar brands such as Pampers, Downy, Tide, Charmin, Gillette, Head & Shoulders, Dawn, Crest, and many more -- all of which remain in demand during recessions.
Even when businesses close and people lose their jobs during recessions, demand for electricity, water, waste collection, and natural gas remains relatively steady. Because of that, utilities and utility-like companies generate reasonably consistent earnings throughout recessions. Some examples of utility companies include:
- NextEra Energy (NYSE:NEE): The large-scale Florida-focused utility and leading renewable energy producer generates stable revenues secured by government-regulated rates and long-term, fixed-rate contracts.
- American Water Works (NYSE:AWK): The nation's leading water and wastewater utility company produces steady earnings supported by government-regulated rates.
- Waste Management (NYSE:WM): The waste collection and recycling company generally has steady revenue streams since demand for its services doesn't diminish much in recessions.
Consumers tend to spend carefully during recessions. Many begin buying lower-priced items and also typically eliminate optional expenses like paying professionals to take care of routine home and car maintenance. Instead, they usually spend more money at dollar stores, home improvement stores, discount retailers, and auto parts stores. Some examples of retail companies that typically benefit from recessions include:
- Walmart (NYSE:WMT): The leading chain of grocery and discount department stores tends to benefit from recessions as more consumers shop its "always low prices" to save money.
- Dollar General (NYSE:DG): Cost-conscious consumers shifting their spending to discount items often buy from this low-priced retailer.
- Home Depot (NYSE:HD): The leading home improvement retailer benefits from recessions because they spur consumers to tackle more do-it-yourself projects to save money.
Diversified portfolios better withstand recessions
Recessions and economic cyclicality are inevitable. Because of that, investors must make sure to construct truly diversified portfolios to weather the downturns. The key to creating a diversified portfolio isn't holding many different stocks but investing in companies across many stock market sectors, including those that are recession-resistant.
Any diversified portfolio includes a mix of the biggest and fastest-growing companies and financially strong companies such as blue-chip stocks, which have the financial fortitude to withstand a recession. Blue-chip stocks are attractive to investors during recessions because they typically pay dividends and provide investors 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 stock market sell-off or recession.
Add some recession resistance to your portfolio
These days, the hot stocks are in the technology and communications industries. It's easy to build a portfolio that skews toward these growth-focused sectors by buying stocks related to megatrends such as 5G, streaming services, cloud computing, and social media.
But these sectors are not immune to 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 tend to pull back on advertising during recessions, which would hurt ad-driven sectors such as social media and some streaming services. As previously noted, consumers tend to eliminate extra costs during recessions, which can impact streaming services and other entertainment options.
Diversify your portfolio and better withstand a recession by adding some of these defensive or countercyclical stocks in the consumer staples, utilities, bargain retailing, and healthcare industries. You can still invest in tech companies, but make sure to offset -- as best you can -- any potential negative impacts of a recession on your portfolio.