Recession Resistant

Recession Resistant

Investopedia / Ryan Oakley

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, products such as gasoline or basic food items may be considered recession resistant because people will continue to consume them regardless of an economic downturn.

Key Takeaways

  • Recession resistant refers to entities such as stocks, companies, or jobs that 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 the 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 revenue is 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. Look for companies that have maintained and expanded their dividends, including through past recessions, and that 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.

Recession Resistant Stocks during the Great Recession (2007-2009)

Between January 2008 and January 2009, the S&P 500 Index declined by more than 40%, one of its worst ever annual declines. The years around this event 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 Inc. (WMT) declined by only 3.7%, while shares in McDonald's Corporation (MCD) virtually broke even. Holders of fixed-income securities did even better than investors in these stocks, with 10-year Treasury securities starting at 5.65% in 1999 and falling to 3.26% in 2009.

Recession-Resistant Stocks in the Most Recent Recession (2020)

The latest recession in early 2020 was caused by the COVID pandemic, which devastated civilian populations and economies the world over. As the virus spread, businesses were heavily affected by shutdowns caused by the virus and a general sense of caution, if not downright panic. While the recession technically only lasted two months, its impact extended for several months to come.

However, as in prior recessions, not every stock suffered as much as others. In particular, low-cost retailers like Walmart outperformed the S&P 500 by 5.5% according to CFRA, a stock research and rating company. Other stocks in recession-resistant sectors, such as consumer staples, home improvement, and big pharma, also outperformed the S&P 500 according to CFRA.

Among other recession-resilient companies that outperformed the S&P 500 in the 2020 recession according to CFRA were Abbott Laboratories (ABT) at 9.8% over the S&P 500, The Home Depot, Inc. (HD) at 5.3%; Synopsis, Inc. (SNPS), a semiconductor/software testing firm, at 70%; Accenture PLC (ACN) at 7.8%; T-Mobile US, Inc. (TMUS) at 55.7%; and The Walt Disney Company (DIS) at 9%.

Are Recession-Resistant Stocks Guaranteed to Go Up in a Recession?

First off, there are no guarantees in the stock market. About the most we can say is that recession-resistant stocks may go up during a recession, but they typically don't fall as much as broader market indexes.

Secondly, there may be stock-specific events that cause outperformance during a recession. Such was the case with T-Mobile in 2020, when it outperformed the S&P 500 Index by 70%. T-Mobile had just merged with Sprint to become the largest telecommunications company in the world, and coupled with the early rollout of its 5G network, this put the company at an advantage over other telecom companies such as Verizon Communications Inc. (VZ) and AT&T Inc. (T).

What Do Recession-Resistant Stocks Have in Common?

Recession-resistant stocks are typically companies that produce goods and services that are needed regardless of the business cycle, commonly known as consumer staples. Discount stores in this sector, such as Walmart and Dollar Tree, Inc. (DLTR), tend to see an uptick in traffic as consumers seek to buy staple goods at lower prices. Other sectors, such as home improvement and entertainment stocks, are also examples of consumers seeking lower-cost alternatives to activities they would ordinarily engage in.

How Can I Take Advantage of Recession-Resistant Stocks?

The first thing to remember is that recession-resistant stocks may fall in line with the broader S&P 500 Index, but just not as much. The second thing to keep in mind is the sectors that are most resilient in times of recession, such as consumer staples, entertainment, and pharmaceuticals, to name just a few key sectors.

Then you will have to seek out the best performing stocks in those sectors, some of which will be trading at a discount to historical performance (dragged down by the overall decline in stocks) or outright gaining because of cyclical demand. Such a situation could represent a discounted stock price and a buying opportunity.

Finally, while some recession-resistant stocks may be at bargain prices during the recession, it may take several months for them to be fully repriced at their fair value, so patience will be needed.

The Bottom Line

Recession-resistant stocks are those shares that do not fall as much as the market or actually post positive gains during a recession. The key sectors to focus on when trying to buy recession-resistant stocks are typically those that provide necessary goods and services no matter what stage the business cycle is in.

Key sectors to follow are consumer staples, utilities, discount retailers, and low-cost entertainment firms (think pay-per-view vs. a night at the movies). These sectors will likely not be immune to overall stock market declines, but they may represent a good buying opportunity at a discounted price courtesy of the recession.

Article Sources
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  2. Yahoo! Finance. "McDonald's Historical Stock Prices, January 1, 2008–January 30, 2009."

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  5. U.S. News & World Report. "7 Stocks That Outperform in a Recession."

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