Recession-resistant investments include stocks in sectors that aren’t strongly affected during economic downturns. Some financial experts argue that sectors like consumer staples, healthcare, and utilities have historically weathered the storms of recession.
But can these industries hold up against a recession today? We explore these sectors to weigh in.
Consumer staples include every-day necessities like food, water, clothing and toiletries. There always will be demand for these goods.
So theoretically, a recession shouldn’t have a major impact on consumer staples. So far, the data tends to back this up. During the last recession at the onset of the COVID-19 pandemic, consumer staples reached low points at 76% of their February 2020 peak, while sectors like energy sunk to less than half their peak.
And according to a January 2009 study published by the global consultancy firm McKinsey & Company, consumer staples weren’t “affected significantly” in the three preceding recessions.
But it’s important to note that consumer staples is a broad category of products. And when money is tight, people may turn to discount brands.
In fact, a study published by the University of Chicago Booth School of Business found that during the Great Recession, consumers increased their spending on retail food purchases overall, but many dumped mid-tier brands and moved to discount products at warehouse clubs.
So it may help to explore stocks of companies producing discount and premium brands, as well as index funds that invest in the broader consumer staples sector.
Regardless of the shape of the economy, people will always need access to healthcare. So you’d expect the healthcare industry to hold steady during recessions.
In the long-run, this seems to be the case. A report published in the New England Journal of Medicine found that during the Great Recession, the number of healthcare expenditures increased as other sectors plummeted.
But the 2020 recession painted a different picture. Year-over-year growth in health services spending dropped by 8.9% in the second quarter of 2020.
This loss may be attributed to the drop in non-essential services as people avoided healthcare facilities to practice social distancing.
But the NEJM study notes that hospitals were losing resistance to economic downturns shortly before the first covid cases.
Researchers found that healthcare was simply becoming too expensive to access in the changing health insurance landscape, and a shift from private to public insurance could cost hospitals an estimated $95 billion in annual revenue.
But luckily, the healthcare sector expands beyond hospitals. It also includes the pharmaceuticals, healthcare equipment, and biotech industries. It even spreads into consumer staples like over-the-counter medicines. Moreover, the covid-specific impact on the healthcare sector may be diminished by widespread access to vaccines and drops in infection cases across the country.
Still, it’s important to carefully vet healthcare stocks and all other recession-resistant investments. Pay attention to their revenue and financial projections.
Historically, utilities have delivered stable returns during economic downturns. During the 2008 financial crisis, the S&P 500 — a common benchmark for the stock market’s health — dropped 10% three months after its October 2007 peak. Meanwhile, utility stocks in the index jumped by 6%.
After all, people and businesses need electricity, water, and gas despite market conditions. But the same story wasn’t repeated during the 2020 recession. The S&P 500 dropped by 14% three months after its February 2020 peak and utilities in the index plunged by 20%.
This may have been due to a decrease in demand as office buildings, schools and other facilities shut down. But as people return to on-site work and school, this issue may not be as significant in a current recession.
However, a recession today would meet a rising interest rate environment. Historically, utility stock indexes typically went down as interest rates increased. And in June 2022, the Federal Reserve announced the highest rate spike in 28 years.
The silver lining is that the Fed aims to keep interest rates around 2.25% to 2.50%, which is historically low.
Plus, the government’s push toward cleaner energy and a rising consumer demand for it could shine a lucrative light on companies producing renewable energy.
Nonetheless, you should strategically analyze the shape of the utility stocks and funds you’re interested in.
Diversification is key
Don’t rely too much on recession-resistant investments. These may not perform as well when the market recovers.
Instead, aim to maintain a diversified portfolio with an appropriate mix of stocks, bonds, cash, and alternative investments.
If you’re nearing retirement, you’ve probably already moved away from a stock-heavy portfolio, so a market downturn may not significantly diminish your savings. And if you’re younger, you have time to recover your losses and amass future gains.
Overall, stay the course. Recessions are hard, but they don’t last forever. A diversified portfolio driven by a personalized investment strategy should weather economic storms throughout your journey.