Luis Pazos 
Recession-proof stocks—do they even exist? Generally, no. Recessions mean the economy is declining, which leads to lower revenue and profits for most companies. This often results in a flat or dropping stock market. So, does that mean investors are destined to lose money during a recession? Not necessarily. While no stock is guaranteed to rise during a recession, some stocks have a history of holding their own even in tough times.
Bet on the Long-Term
Before making major investment changes anticipating a recession, revisit your long-term investing goals. Investing isn’t just for the next few quarters or years but for several years to decades. Recessions are bumps in the road, not reasons to change direction drastically. While recessions can cause significant declines, it’s crucial to remember the benefits of long-term investing. Historically, the stock market has returned an average of about 10.91% annually between 1923 and 2023. No other investment matches these returns over nearly 100 years. The stock market is all about long-term averages, so keep this in mind to minimize short-term declines and prepare for recovery.
Adjust, But Don’t Gut, Your Portfolio
Recessions are opportunities to adjust, not liquidate, your portfolio. Avoid shifting everything to cash as you might miss out on gains when the market rebounds. Instead, favor certain sectors over others. Consumer staples, utilities, healthcare stocks (especially pharmaceuticals), low-priced retailers, and waste management companies usually perform well during recessions. However, it might be wise to avoid sectors like tobacco stocks and alcoholic beverages that performed well in past recessions but are less reliable now. On the other hand, technology, which led the previous bull market, has been hit hard in the current downturn, suggesting it might be time to reduce tech exposure in favor of stronger sectors. The overall goal is to minimize losses and preserve capital to buy stocks at lower prices as the economy stabilizes and the market recovers.
Industry Sectors That Resist Recessions
During recessions, it’s crucial to invest in sectors more resilient to economic downturns, though no sector is entirely recession-proof.
Dollar Stores and Low-Cost Providers
Consumers seek lower-cost alternatives during recessions, so dollar stores like Dollar Tree and Dollar General, along with big-box discounters like Walmart and Target, perform solidly. Even fast-food chains like McDonald’s fare better than higher-end restaurants.
High Dividend Stocks
During downturns, investors shift to high dividend stocks for income. ProShares S&P 500 Dividend Aristocrat ETF (NOBL) and Invesco S&P 500 High Dividend Low Volatility Portfolio ETF (SPHD) are examples that offer dividends and cushioned losses.
Utilities
Utilities perform well during recessions because they provide essential services like electricity and water. Funds like the Utilities Select Sector SPDR (XLU) offer a stable dividend yield and performance resilience.
Consumer Staples
Essential items like food, beverages, and personal goods are always in demand, making this sector resilient. Funds like Consumer Staples Select Sector SPDR (XLP), Vanguard Consumer Staples ETF (VDC), and Fidelity MSCI Consumer Staples Index ETF (FSTA) are good bets.
Healthcare
Demand for healthcare is constant, making this sector resistant to economic downturns. Broad-based funds like Health Care Select Sector SPDR Fund (XLV) and Fidelity MSCI Health Care Index ETF (FHLC) or niche funds like iShares Nasdaq Biotechnology ETF (IBB) are solid options.
Which Industries Outperform During Recessions?
- Healthcare: Always in demand and less volatile.
- Utilities: Provide essential services.
- Consumer Staples: Non-discretionary spending items.
- Cosmetics: People still value appearance.
- Automotive: Transportation remains a need.
- Technology: Essential even in economic struggles.
- Fine Wine: Luxury good with inelastic demand.
Final Thoughts
It’s challenging to avoid investment losses during a recession entirely, but the goal should be to protect your capital for future opportunities. Stay focused on the long-term end of the recession and be prepared for the market to recover.
