There are no recession-proof stocks. However, there are stocks which tend to perform during recessions. Let’s look at how we can find stocks that thrive in a recession.
The most difficult time investing in stocks is when markets are falling and everyone worries about a recession. But the market never fails to give us opportunities, even during the economic downturn.
The Great Recession of 2008-09
The Great Recession of 2008-09 was the worst economic downturn. Since the Great Depression, GDP has contracted for six consecutive quarters, and unemployment has risen to 10% by October 2009. In that period, almost every stock market around the world fell sharply.
The S&P 500, which tracks the 500 largest companies in the U.S. market, declined by nearly 50% from October 2007 to March 2009. So, investing in the stock market during a recession is scary.
However, on the contrary, it also allows us to enter the market at lower prices for the great value in the future if you are wise enough to choose where to put your money.
Investment opportunities during a recession | Are recessions good times to invest in stocks?
Below is the chart depicting the Annual change in S&P 500 index since the last recession in 2008-2009
| Year | Year Close | Annual Change |
| 2022 | 29,490.89 | -18.84% |
| 2021 | 36,338.30 | 18.73% |
| 2020 | 30,606.48 | 7.25% |
| 2019 | 28,538.44 | 22.34% |
| 2018 | 23,327.46 | -5.63% |
| 2017 | 24,719.22 | 25.08% |
| 2016 | 19,762.60 | 13.42% |
| 2015 | 17,425.03 | -2.23% |
| 2014 | 17,823.07 | 7.52% |
| 2013 | 16,576.66 | 26.50% |
| 2012 | 13,104.14 | 7.26% |
| 2011 | 12,217.56 | 5.53% |
| 2010 | 11,577.51 | 11.02% |
| 2009 | 10,428.05 | 18.82% |
| 2008 | 8,776.39 | -33.84% |
| 2007 | 13,264.82 | 6.43% |
Economic slowdown during a recession drags companies’ earnings and profits, resulting in a stock price fall.
Unfortunately, that’s terrible news for investors because the value of your stocks may go down.
So, should you sell your stocks before the price falls too much? Not necessarily. Use the dollar-cost averaging method if your research shows that the company still has excellent fundamentals, strong business prospects, a tremendous price-to-value ratio, and no significant financial debts.
While it’s true that stocks fall significantly during a recession, that doesn’t mean that it’s the wrong time to invest. If you buy stocks when they’re cheap (i.e. when their price is low), there’s a good chance that they’ll thrive after the recession ends.
Finding Recession-Proof Stocks
So, how do you find recession-proof stocks? When markets fall, value investors start to appear like vultures. They buy shares of companies that are out of favour but have strong business models and are trading at a discount to their intrinsic value.
Value investors look for stocks trading at a bargain price, either due to an overall decline in the market or specific news that causes investors to panic and sell.
The best way to look at stable stocks is by asking yourself a question.
“How long do I want to hold these shares if I invest today?”
If your answer is between 1-3 years, then perhaps you would like to check Growth stocks which primarily have an upward growth trend. These stocks can give you a reasonable annual return.
Or if you invest for 5-10 years or maybe beyond that in quality stocks, you can expect a significant return.
Four ways to find recession-proof stocks
Look at the forward price-to-earnings ratio
The forward price-to-earnings ratio is a metric that measures how expensive a stock is from a valuation standpoint. It is calculated by taking the current share price and dividing it by the expected earnings per share for the next 12 months.
This metric has two critical benefits for investors.
First, it provides a way to compare how expensive a stock is relative to its peers.
Second, it can help investors identify undervalued stocks before they become cheaper.
In other words, this metric can be used as a contrarian indicator in both bull and bear markets. To use the forward P/E ratio as a contrarian indicator, look at stocks trading below their five-year average forward P/E ratio in bear markets and above in bull markets.
Find low-beta stocks
The financial crisis of 2008 was the worst economic event in U.S. history. It sparked a worldwide recession, caused the collapse of banks and financial institutions, and resulted in millions of people losing their jobs. Many companies were forced to close their doors, leaving many investors with substantial losses.
Low-beta stocks are less volatile than high-beta stocks because they have lower upward movements in price. Therefore, when the economy is struggling, low-beta stocks are less likely to be affected by the crisis than high-beta stocks.
A beta of less than 1 indicates that a stock’s price moves less than the market as a whole. In other words, it’s less volatile than the market. Low beta stocks are less likely to fall at the pace when the general market falls. So, they’re a good option for investors who want to ride out a recession.
However, this strategy doesn’t always work. Even if you pick low-beta companies doing well in their industries, you can still get burnt. For example, two big recessions have occurred in the past 30 years. Still, all three U.S. recessions were caused by events outside the country’s control – the oil embargoes from the Arab oil embargo and the Yom Kippur War between Israel and Egypt. So, nothing is guaranteed but gathering all the pieces together while making any investment decision will bring positive changes to your portfolio.
Focus on dividend-paying stocks
During recessions, investors typically flock to dividend stocks because they offer the same upside potential as stocks but with a lower risk.
Dividend-paying stocks have historically outperformed non-dividend payers during recessions. That’s because the dividend allows companies to cover their expenses and maintain their share price, even in tough times.
While many dividend-paying stocks are stable and well-established companies, you can also find some high-quality stocks in the low-priced range. This is a perfect time to focus on dividend-paying stocks with solid balance sheets and a history of increasing their dividends over time – the Aristocrat stocks.
It would help if you also were careful when investing in dividend-paying stocks during an economic downturn. When the economy slows down, companies may see a decline in sales and profits. This can lead to lower dividends and increased outstanding shares, hurting your return on investment (ROI).
Companies with Strong Financials
A company’s financials are the most crucial aspect to understand to make an informed investment decision. Financial statements show the current state of affairs at any given time. They reveal how much money the business is bringing in, how much it is spending, and what its debts and assets are.
We can break down a company’s financials into three main areas: profitability, balance sheet and cash flow.
A strong financial picture means the company has enough money to fund daily operations, cover payroll and make debt payments.
The P&L Statement shows how profitable the company is and helps the investors understand the sustainability to continue operations in the future.
It also shows how profitable the company is, which gives investors an idea of how likely it is to continue operating in the future.+
The financial ratios also give you a strong indication of the company’s financial health. Return on Equity (ROE) is one of the most critical ratios we can consider before investing in recessions or in general. Return on equity (ROE) is calculated by a company’s net income divided by its shareholders’ equity. This ratio will tell you how profitable a company is. The higher the ROE, the better a company can turn its equity financing into profits.
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Stocks that thrive during recessions
Historically, stocks from particular segments performed well during economic turmoil. It’s observed that the best-performing stocks fall into the defensive category and these defensive stocks are from the Consumer staples, Utility and Health Care sectors. Investors generally consider these sectors safe and expect them to perform well in recessions.
Consumer Staples
Consumer staples are products that people depend on to get through their day-to-day lives. Staples include food and beverage products, tobacco and other household necessities. During a recession, this sector sees a rise in demand because people spend less on discretionary items like travel and entertainment to save money.
The demand for staple goods increases because people substitute them for entertainment or other luxuries. Consumer staples are also less sensitive to economic cycles because people continue to buy them regardless of the economy’s health.
Staples are also less risky than other sectors because they are generally less volatile. Staples businesses include food and beverage companies, tobacco and other household products.
4 Consumer Staples Stocks you can consider checking out
Coca-Cola Co (KO)
Previous closing price (As of 05th Oct 2022): $56.78
Market cap: 243.22B USD
P/E Ratio: 25.57
Dividend Yield: 3.13%
Walmart Inc (WMT)
Previous closing price (As of 05th Oct 2022): $134.25
Market cap: 360.78B USD
P/E Ratio: 26.53
Dividend Yield: 1.69%
McCormick & Co. Inc. (MKC)
Previous closing price (As of 05th Oct 2022): $74.43
Market cap: 19.67B USD
P/E Ratio: 28.98
Dividend Yield: 2.02%
Utilities
Utilities mean all businesses that provide essential services such as water, electricity, and Internet. Utilities are the primary services required for any business, household, or developed country to function.
A country could not sustain itself at any level if these basic utilities were not available. Examples of utilities include water, power, gas, Internet, and even transportation services.
If any of these essential services fail to deliver, it will cause a ripple effect and disrupt other industries. For example, if the electricity goes offline, it will disrupt the water supply, internet connectivity, and manufacturing units. Utilities are the backbone of any economy and mostly thrive during a recession.
Check these 3 Utility Stocks before investing
Duke Energy Corporation (DUK)
Previous closing price (As of 05th Oct 2022): $97.12
Market cap: 72.39B USD
P/E Ratio: 18.99
Dividend Yield: 4.28%
NextEra Energy, Inc. (NEE)
Previous closing price (As of 05th Oct 2022): $82.82
Market cap: 160.66B USD
P/E Ratio: 62.60
Dividend Yield: 2.08%
Dominion Energy, Inc. (D)
Previous closing price (As of 05th Oct 2022): $71.5
Market cap: 57.45B USD
P/E Ratio: 26.00
Dividend Yield: 3.87%
Healthcare
Healthcare is a sector that generally thrives during a recession. People need healthcare even when the economy is in a recession. During a recession, people may have less money to spend, but they will always want to maintain their current health and wellness levels.
Healthcare sector expenditure contributed almost 18% of the US GDP at the end of 2019, and it will add $6 trillion every year by 2028, according to an article published by Forbes.
Anyone can use healthcare services without discretion. This means that healthcare services will always be in demand during a recession. Healthcare services include doctors, clinics, nursing homes, pharmaceuticals, and supplements. Healthcare is one of the most recession-proof industries.
Worth checking Healthcare stocks
Vertex Pharmaceuticals (NASDAQ: VRTX)
Previous closing price (As of 05th Oct 2022): $300.64
Market cap: 77.46B USD
P/E Ratio: 24.42
Dividend Yield: N/A
UnitedHealth Group Inc (NYSE: UNH)
Previous closing price (As of 05th Oct 2022): $523.17
Market cap: 493.01B USD
P/E Ratio: 27.53
Dividend Yield: 1.25%
Pfizer Inc (PFE)
Previous closing price (As of 05th Oct 2022): $44.46
Market cap: 247.62B USD
P/E Ratio: 8.63
Dividend Yield: 3.63%
Data Source: Google Finance
Investors may consider other Recession-Resistant Sectors
The job market remains challenging for most Americans. The national unemployment rate has stabilized at 5% after spiking above double digits following the Great Recession of 2008 and 2009. However, while some industries enjoy healthy upticks during economic turmoil in business activity, other sectors struggle with stagnant growth or even decline.
While no business can operate in a bubble, identifying which sectors will remain steady even in recessions can help you make informed decisions about where to invest your time and money as an investor. Here are three recession-resistant sectors that will stand the test of time throughout the coming years:
Energy:
Energy stocks are stable due to the never-ending demand for energy products during a recession. Energy is the backbone of modern society, from the fuels we heat our homes to the electricity that powers the Internet. No other sector is as recession-resistant as energy due to the sheer demand for its products.
Despite the great strides in renewable energy over the past few decades, oil, gas, and coal will continue to supply most of the world’s energy needs for decades. That means a healthy market for energy-related business services and products, including drilling equipment and services, refining, pipelines, and more, even in bad economic times.
Technology:
The tech sector has been steadily growing due to the absolute necessity for innovation across all industries. From aerospace and automotive to healthcare and finance, technological advancements are driving most innovation that creates new products, service models, and ways to deliver value.
Demand for new technologies is only expected to intensify in the coming years. The rise of artificial intelligence, machine learning, blockchain technology, and other high-tech breakthroughs will continue to fuel demand for high-skilled workers in the industry.
Since the workforce in this industry is highly skilled, tech companies spend a tremendous amount of time and money on training & retaining them. But due to the recession, the technology industry often has to downsize employees for cost-cutting. Getting fewer businesses, exposure to foreign currency and other cross-border trading challenges make tech stocks vulnerable during an economic recession.
Despite all challenges, technology stocks will always grow with innovations and technological demands at every step of life. If you consider yourself a long-term investor, technology stocks with solid revenue growth should be in your portfolio.
Financials:
Financial services is another sector that has weathered many recessions, droughts, and other challenges in its long history. The industry includes everything from investment management to insurance and everything in between.
The key to the recession-resilience of financial services is the cyclical nature of its products. Individuals and businesses tend to shift their investment strategies when the economy goes through a downturn, often away from stocks. This creates a demand for various insurance and loans that helps offset the drop in business at other financial services companies.
When the economy revives, many investors shift money back into stocks, providing another source of demand for financial services. This constant flow of funds through investment strategies, combined with the wide variety of financial services products, helps protect the industry from broader economic challenges.
Alternatives to stocks tend to do well during a recession.
Exchange-Traded Funds (ETFs) are better in a recession.
Another thing to remember when investing during a recession is that some asset classes perform better than others. For example, real estate prices often fall, whereas gold prices rise during a recession. If invested exclusively in real estate or gold, you may see your assets fall in value during a downturn. ETFs and index funds allow you to diversify your investments across several different assets and market sectors, which means that you can benefit from the best aspects of each asset class while reducing the likelihood of losing money in one sector.
Investing in Index Funds during recessions is a good choice.
Investing in index funds during a recession is also an excellent way to ensure you invest according to your long-term goals and risk tolerance. They are low-cost, low-risk, and sound investment choices for attractive returns—the average annual return on S&P 500 index fund is 10%. There are many different index funds; you can pick whichever index fund matches your investment goals and risk tolerance.
If you want to invest for retirement but reduce risk, you might consider a balanced index fund, which invests in stocks, bonds, and cash. Index funds are often a good choice for investors who are investing for a long-term goal like retirement because they are often inexpensive and easy to buy and sell, making them a good fit for long-term investors.
Few popular ETFs and Index funds to consider in 2022
Fidelity ZERO Large Cap Index (FNILX)
Previous closing price (As of 05th Oct 2022): $13.43
Net Asset: 5.34B USD
SPDR S&P 500 ETF Trust (SPY)
Previous closing price (As of 05th Oct 2022): $377.97
Net Asset: 340.36B USD
iShares Core S&P 500 ETF (IVV)
Previous closing price (As of 05th Oct 2022): $379.47
Market Cap: 2.36B USD
Vanguard Russell 2000 ETF (VTWO)
Previous closing price (As of 05th Oct 2022): $71.08
Market Cap: N/A
SPDR Dow Jones Industrial Average ETF Trust (DIA)
Previous closing price (As of 05th Oct 2022): $303.14
Market Cap: 24.78B USD
Create a diversified Portfolio
The stock market is constantly changing, and fluctuating prices make it risky to put all your eggs in one basket. However, investing in a diversified portfolio can help mitigate some of that risk by spreading your investments. You might invest in stocks, bonds, mutual funds, or real estate.
During recessions, interest rates tend to fall due to lower demand for loans and mortgages. As a result, prices on fixed-income investments such as bonds can drop sharply during recessions. You can avoid significant losses and keep more money safe by strategically placing your assets during recessions.
Takeaway
Time horizon and Risk appetite play a vital role in pivoting your investment decisions into wealth.
Although investing sounds like a good idea when the economy is booming, investing is excellent when it is in turmoil.
During this period, when the general public is most worried about their money, they decide to stay out of the stock market.
Recessions give you opportunities to buy shares in companies at lower prices than usual, so you can make a profit when the economy recovers and the stock price rises again.
Frequently Asked Questions (FAQs):
Retail, Hotels, Restaurants, Travel/Tourism, Leisure/Hospitality, Real Estate, & Manufacturing/Warehouse are mostly hit hardest during a recession.
It is not easy to tell whether a recession is around the corner. However, looking at the economic data and market sentiment, it’s very likely that we may see another recession by the end of 2022 or early 2023.
Consumer Staples, Utility and healthcare are the sectors that historically performed well during the recession.
It’s not certain. But it goes from 10 months to 3 years depending on the economic damage during the economy’s fall.
