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.
- Recession resistant refers to entities 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 downturn, 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.
These industries supply goods and services that economists describe as either income inelastic, or inferior goods. Income inelastic demand is when the demand for a good doesn’t change much when incomes change. People tend to keep buying basic staples for example, even when their incomes fall during a recession. Inferior goods are those where the demand actually increases when incomes fall. Lower-cost consumer goods from discount retailers fall into this category.
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
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%.