The U.S. economy is falling rapidly into a recession due to the expanding COVID-19 crisis. Since we will only know what industries weathered this recession best when it's over, we looked back to the last recession for some guidance. During 2008, in the midst of the Great Recession, CNN reported that just 25 stocks out of the S&P 500 had positive returns for that year.
There are many reasons why these particular stocks increased, and the impact of every economic recession is different. However, looking at which stocks did well can still show broad patterns as to what kinds of stocks may do better in economic downturns.
Here are the top 10 stocks in the S&P 500 by 2008 total return to give you some context, and then we'll break things down by industry:
- Due to underlying economic trends and the immediate public health crisis of COVID-19, the U.S. economy is rapidly falling into recession.
- Historically during recessions, some industries still do reasonably well, or even thrive due to changing patterns of consumption and behavior.
- Often these are industries where demand is inelastic to changes in prices and incomes - the volume of consumer demand is relatively stable.
- Due to the specific circumstances of the current emergency, some industries that usually do well in past recessions may be especially hard hit right now, but other industries are benefiting.
Top 10 Stocks in the S&P 500 by Total Return During 2008
|Top 10 Stocks in the S&P 500 by Total Return During 2008|
|Company Name (Ticker)||1-Year Total Return||Industry|
|Dollar Tree Inc. (DLTR)||60.8%||Discount Stores|
|Vertex Phamaceuticals Inc. (VRTX)||30.8%||Biotechnology|
|H&R Block Inc. (HRB)||25.8%||Personal Services|
|Amgen Inc. (AMGN)||24.3%||Drug Manufacturers-General|
|Old Dominion Freight Lines Inc. (ODFL)||23.2%||Trucking|
|Walmart Inc. (WMT)||20.0%||Discount Stores|
|Edwards Lifesciences Corp. (EW)||19.5%||Medical Devices|
|Ross Stores Inc. (ROST)||17.6%||Apparel Retail|
|Alaska Air Group Inc. (ALK)||17.0%||Airlines|
|Hasbro Inc. (HAS)||16.8%||Leisure|
The stock that beat all other S&P 500 stocks during 2008 was Dollar General, rising more than 60% that year, almost double the second highest-returning stock. In fact, the only industry to come up twice in the top 10 best-performing stocks of 2008 was discount stores, with Walmart in 6th place.
This makes intuitive sense as recessions reduce consumers' income. When consumers' incomes go down, they can either substitute cheaper goods or buy fewer items. Since there is a minimum of how many staple goods like food and basic household supplies you need to buy, you can't just cut them from your budget like you could with a new video game. That means that to save money on them, you will turn to cheaper alternatives. As a result, discount retailers are likely to do well in a recession.
If you group together all companies related to the health care industry, there are three in the top 10, even more than discount retailers.
The reasoning behind this is clear. You need health care to live, and therefore are much less likely to skimp on it even when your income declines. The technical term for this is price inelasticity. Not all health care companies are created equal, and recessions are likely to hurt those companies with more debt and less cash flow.
These enterprises have less ability to absorb losses and service their debt at the same time. Therefore, it may be prudent to stick to health care stocks that have low debt-to-equity ratios and avoid biotech startups that are still in their early phases.
Healthcare, food, consumer staples, and basic transportation are examples of relatively inelastic industries that can perform well in recessions. They may also benefit from being considered essential industries during a public health emergency like the COVID-19 pandemic.
Food and Restaurants
Similar to health care, people need food and can only cut spending on it by so much. Besides discount stores like Dollar Tree and Walmart, which are major grocers, several other companies that make or sell food also made the list. They include packaged food company General Mills, Inc., grocery store chain Kroger Co. (KR), and also restaurant chains McDonald's Corp. (MCD) and Darden Restaurants, Inc. (DRI) (owners of Olive Garden and other casual dining chains).
All of these are relatively inexpensive food options, as people tend to purchase inexpensive items like cereal and switch to less expensive restaurants when they order out or dine out.
Freight and Logistics
Goods need to be moved, recession or not. While personal travel for vacations declines during recessions, there is still a need to move goods to stock store shelves. Old Dominion Freight, Westinghouse Air Brake Technologies (WAB), and C.H. Robinson Worldwide (CHRW) all had positive returns in 2008. All of these companies either move freight or make products that help move freight, in the case of Westinghouse. So freight companies are often safe bets during recessions.
DIY and Repairs
When times are tight, one way to cut costs is to repair what you own rather than replace it, and to do routine maintenance yourself. That may be the reason for the strong 2008 performance from auto parts retailer AutoZone Inc. (AZO), and also from home and garden improvement retailers Tractor Supply Co. (TSCO) and Sherwin-Williams Co. (SHW).
During a recession, consumers are more likely to repair their cars rather than buy a new one, as well as do home improvement and garden work themselves. With ongoing COVID-19 related business closures, DIY activities may include even more industries this time around.
Because of the unique economic shock that the COVID-19 pandemic and public health-related lockdowns present, the companies that do well in the current environment will be somewhat different than a typical recession.
For example, in the food and beverage industry, restaurants in particular have already seen massive closures and will struggle in the near term, but this also might present an opportunity for them to outperform once restrictions are lifted.
On the other hand, companies that specialize in online and remote services, including many tech companies, or companies that produce at-home alternatives to traditional goods and services, like home gym and exercise equipment in the DIY category, have seen business boom during this time and may continue to benefit. Businesses and consumers may be hesitant to re-adopt their pre-social distancing patterns of work, shopping, and lifestyle, and some may find that they simply prefer new ways of doing these things.
Companies that supply services that support online shopping, work arrangements, teleconferencing, and at-home substitutes for traditional services have huge opportunities right now.
Another thing to keep in mind is that due to the emergency nature of the current situation, public policy choices will have an enormous impact on which businesses and industries do better or worse. Industries that can directly benefit from the epidemic response or can successfully exert influence to get themselves declared essential will do better than others.
Finally, there is also a possible threat to consider in the form of proposed excess profits taxes; businesses that outperform in the near term may also end up facing punitive taxes on the excess profits that they make off of the current situation.
Why Do Some Industries Do Better in Recessions Than Others?
Companies that make basic necessities like consumer staples and food will always have demand, even during an economic downturn - as people need to prepare meals, wash, clean, and so on. Discount stores often do relatively better during recessions because their staple products are cheaper. Similarly, healthcare is always in demand.
How Long Do Recessions Tend to Last?
According to economic data, recessions typically last between 8 to 18 months.
What Signals an Official Recession?
Government agencies usually consider the economy to be in a recession if it has experienced negative GDP growth in two consecutive quarters in conjunction with changes in domestic production, real income, and employment.
The Bottom Line
The above list isn't exhaustive, as investing during an economic downturn is an enormous topic. Other areas that are traditional defensive investments are utilities (people always need water and heat), and personal storage (a place to put things when downsizing). That said, this should give you a good place to start looking for how to invest during a recession. Good things to keep in mind are what goods and services people and businesses can easily live without and what ones are essential. In addition, keep in mind what businesses people may patronize more if their income decreases.
As mentioned, it's important to remember that each recession is different, and so will the stocks that do well during them. For example, a lot of biotech companies are rising at the moment due to the widespread COVID-19 crisis. Financial firms were instead devastated by the 2008 recession, because it stemmed from a financial crisis.
One final reminder is that stocks and industries that do well during a recession may not always do well when the economy recovers. So you will need to change your investment strategy when the good times return. Keep that in mind when building your portfolio.
Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal. Investors should consider engaging a qualified financial and/or tax professional to determine a suitable investment strategy.
CNN Money. "S&P 500: The Lucky 25."
Yahoo Finance. "Old Dominion Freight Line, Inc. (ODFL)."
Kiplinger. "10 Recession Facts You Need to Know."
NBER. "Business Cycle Dating Committee."
What Causes a Recession?
7 Ways to Recession-Proof Your Life
5 Things You Shouldn't Do During a Recession
How Do Asset Bubbles Cause Recessions?
Why Does Unemployment Rise During a Recession?
How the Federal Reserve Fights Recessions
What Happens to Interest Rates During a Recession?
Why Is Deflation Bad for the Economy?
Are Economic Recessions Inevitable?
Do Recessions Have a Silver Lining?
The Impact of Recessions on Businesses
9 Businesses That Thrive in Recession
Industries That Have Thrived During Recessions
What's the Best Investing Strategy to Have During a Recession?
5 Characteristics of Recession-Resistant Companies
3 Ways to Take Advantage of a Recession
4 Ways to Hedge the Next Recession
A Review of Past Recessions
A Look Into the Great Recession
American Recovery and Reinvestment Act (ARRA)
5 Top Investors Who Profited From the Global Financial Crisis
Double-Dip Recession Definition
What Is an Economic Cycle?
Economic Recovery Definition
What Is Fiscal Policy?
Growth Recession Definition
What Is an Inverted Yield Curve?
Recession Proof Definition
What Does “Recession Resistant” Mean?
K-Shaped Recovery Definition