DEFINITION of 'Recession Resistant'

An entity which is not significantly affected by a recession. Recession resistance can apply to stocks, companies, businesses, jobs and even entire industries. For example, items such as bread and other basic food may be considered recession resistant, as people will continue to eat regardless of a recession.

BREAKING DOWN 'Recession Resistant'

An economic downturn, known as a recession, is an essential factor to consider in investing. Every portfolio should contain instruments that will continue to perform well or outperform the market in hard economic times. Recession resistant industries include consumer staples, grocery stores & discount retailers, alcoholic beverage manufacturing, cosmetics as well as death and funeral services. 

Safer Harbors in a Downturn

During times of recession, portfolio diversification plays an even larger role than normal. It is wise for investors, even in times of plenty, to have a wide variety of investments included in their portfolio to ensure them no matter which way the economy turns. Types of stock that will provide insurance during a recession are called recession-resistant stocks.

When investing in stocks during recessionary periods, the relatively safest places to invest are in high-quality companies that have long business histories because these should be the companies that can handle prolonged periods of weakness in the market.

Recession Resistant Example 

For example, companies with strong balance sheets, including those with little debt and healthy cash flows, tend to do much better than companies with significant operating leverage (debt) and weak cash flows. A company with a strong balance sheet and cash flow is more able to handle an economic downturn and more likely to be able to fund its operations despite the tough economy.

By contrast, a company with a lot of debt may be damaged if it can't handle its debt payments and the costs associated with its continuing operations.

Dividend-paying stocks are another good place to invest when times are hard. Companies that pay dividends tend to be in mature industries, and the dividends will cushion your returns at a time when share prices may be falling. Look for companies that have a solid long-term history of increasing dividends and that have sufficient resources to continue to make the payouts.

Fixed-income markets tend to do comparatively well in a recession. U.S. Treasuries, especially long-term bonds, are believed to be safe havens. After all, the government will continue to pay its obligations, investors reckon. Also, interest rates tend to fall during a recession, pushing up the value of existing bonds. 

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