How To Choose Recession-Proof Stocks To Fortify Your Portfolio In 2023

Key takeaways

• Tech is the big loser of recessions, while essential goods usually weather the storm.
• A few industries tend to buck the trend of dipping in recessions to provide consistent dividends.
• Some stocks have fared well in the last year and could be players to watch, but there’s never any guarantee that any will make big returns in 2023.

Let’s face it: a recession isn’t a lot of fun for the stock market. As companies’ customers disappear, spending shrinks and their stock value lessens.

This is especially true in tech, with Big Tech giant Meta currently down two-thirds of its value. Other companies aren’t faring much better. Some are even saying we’re heading for the longest bear market of all time.

But that’s not to say there aren’t gains to be made. Companies that provide key services, like consumer goods and utilities, fare relatively well. This is because people will always need food, water and electricity after the luxuries are cut back.

With this in mind, it’s possible to find stocks that outperform the S&P 500 in recessions.

Let’s dive into what to look out for when picking recession-proof stocks and our recommendations for the 2023 downturn.

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Picking recession-resilient stocks

Picking stocks in a recession needs a different strategy.

There might be some surprise winners in 2023. Looking at the geopolitical landscape, we’re setting up for a big power grab over the semiconductor industry. We’re also facing a climate crisis, so climate-tech companies are the investment of tomorrow. But there’s no guarantee.

If you want to recession-proof your portfolio, you need to look for defensive stocks. These are stocks that won’t rapidly go up in value. Instead, they stay steady, giving consistent dividends. Typically, these companies weather economic storms.

Chances are, the best recession stocks are companies you’ve never heard of. They’re the ‘unsexy’ businesses that keep the world turning. They aren’t in the news every day. This is where their strength lies: providing steady, consistent returns.

Recession-proof industries

For investors looking to diversify their holdings with some defensive options, looking at the past can sometimes determine the best path forward. We’re in the third recession in 15 years, so there are recent examples of recession-proof stocks.

Here are the industries that performed well in 2008 and 2020.

Utilities

Gas and electricity that people need for transport and homes are always in demand. This makes them solid stock choices for a recession-proof portfolio.

NextEra Energy, Exelon Corp and Southern Co have all remained stable in price despite the chaos in other parts of the economy. With the price of natural gases and electricity up at the moment, there’s no sign of this industry slowing down in the 2023 recession.

Consumer goods

Anything that involves selling an essential product is a safe bet during a recession. Whether it’s deodorant, pantry staples or baby products, these goods will always be in demand.

Companies like Procter & Gamble, Unilever, and British American Tobacco are all currently performing solidly. While this recession might be more drawn out than others, consumer goods tend to stay steady regardless.

Healthcare

When a person gets ill, they need treatment – regardless of if a recession is happening. This makes healthcare and pharmaceuticals a largely recession-proof stock choice.

There’s also a more recent success story for this industry. With the 2020 recession, healthcare naturally performed well due to the circumstances surrounding the economic downturn. Examples of this are Johnson & Johnson,

Telecoms

Another simple reason: people need to get in touch with one another and access information. In this interconnected world, that means telecoms and internet service providers are the big business of recessions.

AT&T, Verizon, and Comcast are all solid examples of the telecommunications industry that have held steady in the last year, despite the bear market.

Surprising recession-proof industries

Want to wander off the beaten track? These other industries might not come to mind right away, but overlook them at your peril. Some of these newer or overlooked sectors might offer surprisingly consistent returns.

Let’s look at some more unusual options for a recession-proof portfolio.

Gold mining

When a recession hits, people revert to the safe havens of currency – one of which is gold. It’s a classic example of a negative beta stock: where the returns are often the opposite of what the rest of the stock market is doing.

This is because banks and governments often look to bolster their reserves with gold, so a brief uplift in demand for mining the natural resource usually hits the market.

As the price of gold typically rises when the economy nosedives, investing in the gold mining industry could provide steady returns.

Gaming

The gaming industry has exploded in the last decade, eclipsing the value of the film and music industries combined in 2021. That trend shows no signs of slowing down as game franchises expand into new media types.

If you consider the habits of people cutting back, they’re spending more time at home. Cue purchasing something that will keep them busy for a few weeks: a game. Mobile games with microtransactions are a steady stream of revenue for gaming companies, too.

Gaming offers potential consistent returns in a recession, but be sure to do your own research before investing.

Funeral homes

If there’s one thing that’s certain in this life, it’s death. The funeral industry is considered a necessity despite the economic outlook. While people cut back on spending in other areas, if a loved one passes then a funeral is paid for.

Independent funeral homes are fairly insular: they focus on the local economy around them. When you pair that with the consistent need for funerals, they’re generally protected from wider downturns.

Logistics

It makes sense that while essential consumer products remain strong throughout a recession, transporting said goods is also integral. This makes logistics a solid investment choice for a recession-proof portfolio.

FedEx, CH Robinson and XPO are some examples of large, public logistics companies that could be good recession-busting stocks for your portfolio.

The simple way to invest during a recession

If trying to pick the best stocks in a recession seems like too much work, there are other options. The use of ETFs and investment funds can be a great way to get significant diversification, and choosing factor based ETFs means you can tilt your portfolio towards particular types of stocks, like value stocks, which have the potential to outperform during rough times.

With Q.ai, you even take that a step further, and harness the power of AI to run your portfolio for you.

A great example is our Smarter Beta Kit. This is an investment portfolio (which we call a Kit), which uses AI to predict the performance of a range of different factor ETFs. These all tilt towards a particular type of stock, such as value, growth or momentum.

Every week, our AI predicts how these different factors are likely to perform on a risk adjusted basis, and it then automatically adjusts the Kit accordingly.

It’s cutting edge investment technology that implements strategies usually only the wealthiest people can afford. But we’ve made it available for everyone.

Download Q.ai today for access to AI-powered investment strategies.