Industries That Can Thrive During Recessions

The U.S. economy is falling rapidly into a recession. 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. In the first quarter of 2020, the economy was rocked by a short-lived but gruesome recession sometimes referred to as the Great Lockdown. During that period, only 32 stocks in the S&P 500, representing 6% of the total index, posted positive returns.

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 10 stocks that faired best in the S&P 500 in the first quarter of 2020 by total return to give you some context. After that, we'll break things down by industry.

Top 10 Stocks in the S&P 500 by Total Return During Q1 2020

Source: YCharts

Health Care

The stock that came out on top during the first quarter of 2020 was Regeneron Pharmaceuticals, a biopharmaceutical company that develops and markets drug treatments for patients with various illnesses and diseases. Like Gilead Sciences which also made the list, Regeneron's shares were lifted because of the hype surrounding a treatment it was developing to combat the COVID-19 virus.

That said, healthcare is a sector generally renowned for faring better during downturns. The reasoning behind this is clear: you need healthcare 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 healthcare 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 healthcare stocks that have low debt-to-equity ratios and avoid biotech startups that are still in their early phases.

Information Technology

Information technology was the most represented industry on the above list, with three companies from this sector generating double-digit returns when the economy was in meltdown.

These three outperformers were popular with investors not necessarily because of their defensive characteristics but rather because they stood to benefit from the global lockdown inflicted by the COVID-19 virus. Citrix was buoyed by the rising use of video conferencing, NortonLifeLock by an increasing need for cybersecurity and information backup solutions, and NVIDIA by surging demand for video gaming and home computer solutions.

Nevertheless, as with healthcare, information technology can be considered more resilient than others during a downturn. Historically, this sector was always considered to be cyclical. However, lately, that opinion is beginning to change, due to a growing need for these types of products.

Real Estate

Few people would associate a recession with a booming real estate industry yet two companies from this sector outperformed in the first few months of 2020.

Data center REITs like Digital Realty and telecommunication tower REITs such as SBA Communications tapped into business trends of early 2020, including homeworking and the accelerated rollout of 5G technology. They proved to be the exceptions as other real estate investment trusts (REITs) got clobbered during that period.

Generally speaking, real estate is considered a very cyclical industry. However, there can always be exceptions and certain types of REITs are described as more defensive as people always need housing regardless of the state of the economy. A lot depends on the specific sector, the income produced, and the financial strength of each individual security.

Communication Services

The communication services sector is a broad one. It includes telecommunication companies, social media and internet search companies, streamers, and video game makers. Some of its biggest names are Facebook’s Meta, Google's parent Alphabet, Verizon, and Netflix.

The fact that Netflix thrived in early 2020 is no secret. When people were forced to stay at home, a lot of them binge-watched movies and tv shows, lifting subscription numbers and the California-based streamer’s share price. It could be argued that streaming services are discretionary and the kind of thing that people stop paying for when times are hard. However, that definitely wasn’t the case at the beginning of 2020, at least for Netflix.

Again, each company and recession is different, meaning there are no guarantees who will outperform. Normally, you'd assume that telecom companies will be less sensitive to market movements and that internet tech companies reliant on advertising dollars could struggle as marketing budgets are cut.

Consumer Staples

Clorox had a really good start to 2020 because its four-in-one disinfectant and sanitizer wipes were widely used to protect against the spread of the coronavirus. However, it wasn’t the only consumer staple to post decent returns when most of the stock market was struggling. Other high flyers included Kroger, Hormel Foods, General Mills, Costco, and Colgate.

Consumer staples tend to do well during recessions because they supply everyday necessities. When the economy hits rock bottom and people find themselves out of work, they still need to eat, wash, brush their teeth, and so on.

Not Every Recession Is the Same

No recession is exactly the same. Each one can be caused by different factors and vary in nature. This means while one industry might thrive during one it could struggle immensely during another.

The 2020 recession was particularly unique. The spread of a killer virus and an enforced lockdown aren’t things that happen very often. In fact, as is made clear throughout this article, many of the companies that performed best in the first quarter of 2020 did so because they stood to benefit in some way from the virus and lockdown and not necessarily because they are better equipped to withstand a recession.

The challenges facing the economy in 2022 are different. In many ways, we are in uncharted territory again. The current situation was created from a combination of COVID-19, the war in Ukraine, the energy shock, and years of rock-bottom interest rates. These events, it’s fair to say, aren’t normal. The problem now is high inflation and rising borrowing costs and this particular economic environment could well see other companies and industries fare better.

Generally, the industries known to fare better during recessions are those that supply the population with essentials we cannot live without that. They include utilities, health care, consumer staples, and, in some pundits’ opinions, maybe even technology.

However, as is the case with recessions, not all companies in the same industry are alike. End markets, cyclicality, and balance sheet strength can differ considerably. Other things to keep in mind include public policy choices to tackle recessions, which can have an enormous impact on which businesses and industries do better or worse.

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 which 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 are the stocks that do well during them. For example, a lot of biotech companies rose during 2020 due to the widespread COVID-19 crisis. Financial firms, meanwhile, were devastated by the 2008 recession because the market mayhem 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.

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