What Does Recession Resistant Mean?

An entity that is not significantly affected by recessions is considered recession resistant. Recession resistance can apply to products, companies, jobs, or even entire industries. For example, items such as gasoline or basic food items may be considered recession resistant because people will continue to consume them regardless of a recession.

Key Takeaways

  • Recession resistant refers to an entity such as stocks, companies, or jobs which are not greatly affected by a recession.
  • Examples of industries considered recession resistant include consumer staples, alcoholic beverage manufacturers, discount retailers, and funeral services.
  • Fixed-income instruments can also be recession resistant, such as in the case of 10-year Treasury securities, which increased in value during the Great Recession.

How Recession Resistance Works

An economic downtown, known as a recession, is an essential factor to consider in investing. Many investors will include assets in their portfolios that are expected to perform well in hard economic times. Industries thought to be recession resistant include consumer staples, alcoholic beverage manufacturers, discount retailers, and funeral services.

In addition to belonging to recession-resistant industries, resilient companies are likely to have strong balance sheets. This is especially true if the company has little debt and healthy cash flows, as this will allow them to maintain operations and even take advantage of the depressed market to make new investments more cheaply. By contrast, companies with a lot of debt may fall behind as a growing share of their revenues are absorbed by debt payments.

Dividend-paying stocks are another good place to invest when times are tough. Companies that pay dividends tend to be in mature industries, and the dividends can cushion your returns at a time when share prices may be falling. Look for companies that have maintained and expanded their dividends, including through past recessions, and who have ample resources to continue making payments.

Aside from stocks, fixed-income instruments such as government and corporate bonds tend to do comparatively well in a recession, as investors tend to seek more conservative and predictable investments. Also, interest rates tend to fall during a recession, pushing up the value of existing bonds.

Real World Example of Recession Resistance

Between January 2008 and January 2009, the S&P 500 index declined by almost 40%, one of its worst ever annual declines. The years that followed have come to be known as the Great Recession.

But recession resistant securities did far better than the stock market as a whole. During that same timeframe, shares in Walmart (WMT) declined by only 13%, while shares in McDonald’s (MCD) broke even. Holders of fixed-income securities did even better than these stocks, with 10-year Treasury securities appreciating by about 10%.