Are Any Stocks ‘Recession Proof’?

A common concern for investors is where to hold their assets during a recession. Trying to time the market is a risky approach, so how should you invest during a recession? What stocks will generally perform better during a downturn?

Key Takeaways

• Defensive stocks are a great way to mitigate risk, there is a list of industries below to help identify more options.
• Further hedge away from marketplace volatility with more inflation-protected securities, short-term bonds, and cash.
• Benchmarking is an essential skill, small gains in hard times might be a sign of strong performance if you’re benchmarking appropriately.

Are we officially in a recession?

A recession is commonly defined as an economic decline in the gross domestic product (GDP) in two successive quarters. The National Bureau of Economic Research, however, officially makes the call.

GDP is a lagging indicator of a recession. In other words, by the time the data comes out to signal the economy is in a recession, the economy has already been experiencing its effects.

For example, the recession in the early 1990s began in July of 1990, although the GDP data showing two consecutive quarters of negative growth came out in October of that year. Since the third quarter of 1990 was the second consecutive quarter of negative GDP, the economy was in a recession as of July 1990.

But the stock market began falling at the beginning of the year, ten months before the data proved the economy was in a recession. Investors must know the differences between leading and lagging indicators to take appropriate action in real time since waiting could hurt their investment returns.

Investing During a Recession

How can you make money in the stock market when the economy is in a recession?

First and foremost, we should note that all stocks have risks. However, some of those risks are not closely correlated to a recession, meaning a recession will have minimal impact on particular stocks. These stocks are known as defensive because they defend against a declining economy.

On the other hand, there are stocks you do not want to own during a recession. For example, leisure stocks might be something to stay away from when the economy slows. If people struggle to pay their bills, chances are they won’t be booking a cruise or a long weekend at the spa for a little while.

Which Stocks Are Defensive?

Defensive stocks are companies that continue to perform well even during market downturns. These companies have consistent cash flow with low volatility and a history of performance stability. Historically, there are specific industries that perform well when the market falls.

• Consumer Staples: Some goods are necessities and are purchased regardless of how well the overall economy is doing. Families always buy bread, milk, produce, canned goods, and toiletries. While they may not buy as much, they still need these items to survive.
• Healthcare: Regardless of the market cycle, health needs will remain intact and somewhat insulated from a recession. Regardless of whether the economy is doing well, you will seek medical attention if you break your arm.
• Utilities: We will all have to continue paying for electricity, gas, water, and waste services, even during a recession.
• Discount Stores: When money is tight due to high unemployment, people stretch their dollars as far as possible. This budgeting often means shopping at dollar stores and buying clothing at discount retailers.
• Basic Transportation: Trucking, shipping, and railroads also hold up well during a recession as goods and supplies are needed. There may be a decline in the number of goods shipped, but something will always need transporting.
• Gold: Investors should not use gold to grow their money, as it is a store of value. Since gold does not lose value, it is often purchased as a hedge against inflation.

If you’d like to have a portfolio that automatically makes these types of adjustments for you, you might consider moving over to an AI-managed account, like Q.ai. You can activate a feature like Portfolio Protection at any time to protect your gains and reduce your losses, no matter what industry you invest in.

Benchmarking Your Portfolio in a Recession

Remember that even a modest gain is a win for your portfolio when the overall market is down. How would you feel if your account gained 1% for the quarter, even as the overall market was down 4%? While a 1% gain may not seem like much, it shows your investments are still positively performing even during a recession.

To get the clearest sense of your investment’s performance, you should benchmark that data against an appropriate index with similar risk characteristics and holdings.

For example, if you have a portfolio of all stocks, you want to compare it with the S&P 500. If your portfolio is 50% stocks and 50% bonds, it would be unfair to compare it with S&P 500 because the risk characteristics are uniquely different. In this case, you would want to compare your returns to the BlackRock 50/50 Target Allocation.

The Stock Market is More Forward-Looking Than the Economy

Using multiple data points gives you a better understanding of where the economy is going. It is vital to remember the stock market is always forward-looking, trying to price in what will happen within the economy 6 to 12 months down the road.

Another key indicator of economic behavior is consumer sentiment. Like the stock market, this is a leading indicator that lets investors know consumer confidence in the economy. If this number rises, it can clue into the easing of a recession.

In contrast, GDP is a lagging data point, meaning investors won’t know of a recession by this data until it is reported after the downturn. The U.S. has often exited short recessions when GDP data confirms the economy experienced one.

People may ask how the stock market can go up during a recession, and the answer lies within the differences in how economic and financial data are reported. Always remember that the stock market is looking forward by several months while the data confirming a recession is faces backward.

How To Recession-Proof Your Portfolio

As we enter what feels like a looming recession, a few strategies exist to consider. Warren Buffet once quipped about investing in a down market, “Only when the tide goes out do you see who’s been swimming naked.” Keep your suit on with these few recession-proofing ideas.

• Be committed to your portfolio for the long term. It can take some time to get through the market cycle. A declining stock market always seems to take the elevator down, while the climb up feels like you’re taking the stairs. Expect this.
• Know yourself and your tendencies: If you’re going to panic when the market goes down 20% or more, don’t wait to get out then. Instead, sell now and wait for your next entry point back in. It can be an emotional ride to watch your account fluctuate.
• Change the allocations within your portfolio and seek more defensive stocks, as described above.
• Overweight the safe side with more inflation-protected securities, short-term bonds, and cash. If your account goes down 50%, it will need to earn 100% to return to where it was. Protecting the downside in a down market can be helpful.

You are never fully insulated from all risks or losses, but having a mindful strategy can make a big impact on your accounts.

If you build a balanced portfolio, you can earn a healthy return while the market is going well and protect yourself when the market takes a downturn. This doesn’t mean you won’t lose money, but you will likely face less staggering losses.

Will your allocation and portfolio be okay when the market has a downturn? There are ways to make your portfolio more defensive. Take a look at Q.ai’s Inflation Kit and protect your investments from dropping in value.

The Bottom Line

Investors should not sell and hide their money under mattresses when the economy goes into recession. Educating yourself on recession-proof stocks leads you to discovering the best-performing stocks based on current market conditions. And with a well-diversified portfolio, you can ride out any downturn.

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