Discovering stocks that perform well during both economic downturns and upswings seems ideal, doesn’t it? They would rise during bull markets and remain stable during bear markets. However, stocks and markets don’t quite operate that way.
Stock investing involves balancing risk and reward. Thus, there aren’t truly stocks that are immune to economic recessions. However, some stocks perform better during economic downturns. They possess attributes that make them defensive during these periods, meaning they perform better and are less volatile. The key is to find and invest in them.
Recession-resistant stocks can reduce portfolio volatility, making fluctuations easier to tolerate. Stocks typically drop an average of 20% or more during bear markets, which is a steep decline.
Some stocks don’t experience such significant drops because they have lower beta values (a measure of volatility). On the flip side, they typically don’t rise as much during bull markets.
Disclaimer: The author is not a licensed or registered investment advisor or broker/dealer. He does not provide personalized investment advice. Consult a licensed investment professional before investing.
Are We in a Recession?
As of September 2022, technically, we are in a recession, although it may not feel that way. An economic recession is typically defined as two consecutive quarters of economic contraction as determined by the National Bureau of Economic Research.
Thus, the United States entered a recession as GDP contracted in the first and second quarters of 2022. For example, GDP contracted by 1.6% in the first quarter and 0.6% in the second quarter of 2022. However, the bureau has not formally declared the U.S. to be in a recession.
Why? The unemployment rate is below 4%, and U.S. job growth has been steady for 20 consecutive months. These indicators are hard to argue as signs of an economic recession. Nevertheless, focusing on recession-resistant stocks remains worthwhile.
The Stock Market is Declining
Regardless of whether the U.S. and the world are formally in a recession, the stock market’s performance mirrors the economy for several reasons.
First, inflation affects the stock market. The Federal Reserve’s response with rate hikes impacts the stock market. Secondly, geopolitical concerns also influence the stock market, such as the war in Ukraine. Lastly, droughts have a significant impact on food prices.
Smart investors plan ahead and focus on recession-resistant stocks in specific industries.
Types of Well-Performing Stocks
Among the 11 stock sectors, some sectors are more defensive than others. For example, consumer defensive stocks have historically performed relatively well during economic downturns. This is because consumers need essentials and food regardless of economic conditions.
Other industries that perform well include healthcare and utilities. Finally, discount stores often perform well during economic downturns as consumers cut back on purchases. Therefore, you can create a less volatile diversified portfolio by picking stocks from these sectors.
It’s important to remember that there are no truly recession-resistant stocks. Todd Pouliet of Gateway Financial says, “There are no stocks that are completely recession-proof. Historically, some sectors such as consumer staples, healthcare, and utilities have outperformed during economic downturns.”
Indeed, you can also consider beauty cosmetics companies like L’Oreal SA (LRLCF). Financial advisors also point out that value stocks and commercial real estate are potential good investments during economic downturns.
He adds, “Remember, when these choices fail, we call it a black swan event, but black swan events seem to happen more frequently than in the past, so there’s no real safe haven. The best way to protect yourself is proper asset allocation and rebalancing when needed.”
4 Recession-Resistant Stocks
- Johnson & Johnson (JNJ) – The global healthcare giant with diversified businesses in consumer health, pharmaceuticals, and medical devices is the first recession-resistant stock. The company’s beta coefficient is low at 0.61, meaning its stock price isn’t as volatile. Moreover, JNJ has a strong balance sheet and pays a dividend yield of approximately 2.8%.
- Procter & Gamble (PG) – PG operates in five segments: beauty, grooming, health care, fabric and home care, and baby, feminine, and family care. With a beta of 0.36, it’s less correlated with the market’s movements. PG is known for its dividend growth, having raised its dividend for 66 consecutive years.
- General Mills (GIS) – GIS operates globally in five segments: U.S. retail, convenience stores and foodservice, Europe and Australia, Asia and Latin America, and Pet. With a beta of 0.34, GIS is a low-volatility stock. Moreover, it has increased its dividend for over 100 years.
- Consolidated Edison (ED) – One of the oldest utility companies in the U.S., Consolidated Edison serves the New York metropolitan area. With a beta of 0.25, ED is less volatile, making it a reliable stock during uncertain times. ED has a dividend yield of approximately 3.3% and has raised its dividend for 48 consecutive years.
Final Thoughts on Recession-Resistant Stocks
While tech stocks performed well during the bull market from 2013 to 2021, especially during the pandemic, all good things come to an end. The bear market of 2022 has punished these stocks.
Therefore, investors seeking diversified portfolios may need to add some recession-resistant stocks in sectors such as consumer staples, healthcare, and utilities.
However, remember that there are no truly recession-resistant stocks, only stocks that perform better during economic turmoil. These types of stocks are typically established companies that pay dividends.
