Recessions are a normal part of the economy that almost every stock market investor eventually has to deal with. While they are very hard to predict, there are warning signs derived from historical data that can offer some insight. But what are the best stocks that can outperform in a recession?
Periods of market contraction can be gutwrenching for investors. Even the most high-quality companies can be greatly dragged down during a recession.
By looking at the historical data, you can determine what stocks have outperformed even during hard times. Another way to do it is by thinking about your own behavior. When the economy tanks and money gets a bit tight for many, there are some things that people will still continue to do or consume.
Key Takeaways
- Recessions can last from a few months to a few years
- Some industries are less exposed to recession risks (healthcare, consumer staples, utilities, etc.).
- Long-term investment and diversification can strengthen your position.
- Controlling your emotions and mindset is all the more important during a recession.
Important Note
I wrote this article from the perspective of a long-term investor. I want to ensure that my readers get information based on my investment philosophy when it comes to stock investment:
#1 Buy and hold Stocks for 5+ years #2 Have at least 25 Stocks #3 Don’t overreact on short-term news #4 Reinvest into your winners
Table of contents
What Is A Recession?
In technical terms, a recession is a period of economic decline. During that time, economic activity and industrial activity are reduced across the entire market. It is identified as such by a negative GDP on at least 2 consecutive quarters.
Recessions can last long and negatively impact income, employment, retail, and more. And, of course, they can impact financial products such as the stock price of your investments. It can be a brutal experience and severely hit the market share of companies.
Take a look at the following overview of past recessions in the United States. This gives you an idea of just how often recessions happen.
| Name | Period | Length |
|---|---|---|
| Great Depression | August 1929 – March 1933 | 3 years 7 months |
| Recession of 1937–1938 | May 1937 – June 1938 | 1 year 1 month |
| Recession of 1949 | November 1948 – October 1949 | 11 months |
| Recession of 1953 | July 1953 – May 1954 | 10 months |
| Recession of 1958 | August 1957 – April 1958 | 8 months |
| Recession of 1960–1961 | April 1960 – February 1961 | 10 months |
| Recession of 1969–1970 | December 1969 – November 1970 | 11 months |
| 1973–1975 recession | November 1973 – March 1975 | 1 year 4 months |
| 1980 recession | January 1980 – July 1980 | 6 months |
| 1981 – 1982 recession | July 1981 – November 1982 | 1 year 4 months |
| Early 1990s recession | July 1990 – March 1991 | 8 months |
| Early 2000s recession | March 2001 – November 2001 | 8 months |
| Great Recession | December 2007 – June 2009 | 1 year 6 months |
| COVID-19 recession | February 2020 – April 2020 | 2 months |
It also gives a great estimate of how long a recession usually lasts. COVID-19 was by far the shortest recession we ever had, with just 2 months. The Great Depression from 1929, in contrast, lasted for 3 years and 7 months.
What’s important to understand are the dynamics of interest rates and recessions. The interest rate typically grows during good times. The goal is to curb the high inflation and, therefore, price hikes. This eventually slows down the economy. If the slowdown is too big, a recession starts. During recessionary periods, the interest rate is lowered again by the Federal Reserve to stimulate the economy and to spur economic growth.
What Are Some Recession-Proof Industries?
The impact of a recession is not always even. Some industries are harder hit than others. When the economy slows down, there are certain industries that we consumers just can’t escape easily. They provide essential services and goods.
Our fiscal behavior has a great impact on how well companies perform during these times.
Utilities
Everybody needs water, gas, and electricity. That also stays true in a recession. We just can’t live our lives without them. So, companies in the utilities sector will probably feel the effects of a recession much less than other industries.
Utility stocks that can outperform in a recession:
- Exelon Corporation (EXC) – Exelon Corporation can be an appealing stock during a recession due to its prominent presence in the electric utility industry. It provides essential electricity services, which typically maintain stable demand, making it a potentially stable investment option during economic downturns.
- Duke Energy Corporation (DUK) – Duke Energy Corporation can be a reliable stock during a recession as it is a major player in the electric utility sector. It also provides essential electricity services, which tend to have steady demand even in economic downturns, making it an attractive choice for investors seeking stability.
- Dominion Energy, Inc. (D) – Dominion Energy can be a solid stock during a recession because it operates in the utility sector. It offers essential electricity and natural gas services with relatively stable demand. This makes it an appealing option for investors looking for stability in economic downturns.
- American Water Works Company, Inc. (AWK) – American Water Works Company can be a dependable stock during a recession as it provides essential water and wastewater services. They are typically non-discretionary and maintain consistent demand, offering investors a defensive investment choice.
Consumer Stables
The term consumer staples refers to essential products used by us, the consumers. It includes food, beverages, household goods, etc.
Since these products are essential to everybody, they will not be easily cut from your expenses. After all, people still need to eat and drink, right?
Consumer Stables stocks that can outperform in a recession:
- PepsiCo, Inc. (PEP) – PepsiCo can be considered a resilient stock during a recession due to its diverse portfolio of food and beverage products, including popular brands. They often have stable demand even in economic downturns, making it an attractive option for investors seeking stability in uncertain times.
- The Procter & Gamble Company (PG) – The Procter & Gamble Company can be a sound stock during a recession because it manufactures and markets essential household and personal care products with strong brand recognition. These tend to maintain consistent demand even in economic downturns.
- The Kroger Co. (KR) – Kroger can be a favorable stock during a recession due to its position as a leading supermarket chain. It offers essential groceries with relatively stable demand, making it a defensive investment option.
- Unilever PLC (UL) – Unilever’s focus on essential consumer products, global presence, strong brand portfolio, and historical dividend payments make it an attractive stock for stability-seeking investors during a recession.
- Costco Wholesale Corporation (COST) – Costco can be a favorable investment during a recession due to its membership-based model, focus on essential goods, and reputation for offering value, which tends to drive steady demand and customer loyalty even in economic downturns.
Healthcare
When our health is on the line, it doesn’t really matter if we are in a recession or not. Your body does not care about that stuff anyway. You will need to seek out a doctor or get the surgery that you need. That is why healthcare companies are uniquely positioned during an economic cycle of a recession.
This excludes anything that falls under elective surgery or surgery that isn’t strictly necessary because of an immediate health risk. Another area that is excluded is cosmetic surgery.
Healthcare stocks that can outperform in a recession:
- Johnson & Johnson (JNJ) – Johnson & Johnson can be a strong investment during a recession because it is a diversified healthcare company with a portfolio of essential healthcare and consumer products. This includes pharmaceuticals, medical devices, and over-the-counter medications. They tend to maintain steady demand even in economic downturns, providing resilience and stability for investors.
- UnitedHealth Group Incorporated (UNH) – UnitedHealth Group can be a compelling investment during a recession due to its position as a leading health insurance and healthcare services provider. It offers essential healthcare coverage and services that people continue to prioritize, leading to stable demand even in economic downturns, making it an attractive option for investors seeking resilience and long-term growth.
- CVS Health Corporation (CVS) – CVS Health can be an appealing investment during a recession, providing essential services such as prescription medications, healthcare clinics, and retail pharmacy products. CVS Health’s diversified business model, including both retail and healthcare services, can provide stability and potential growth opportunities during uncertain economic times.
Investment Opportunities in a Recession
I always think about recessions or downturns as opportunities. And I think you should do that too! Recessions provide unique investment opportunities that aren’t coming along often.
As discussed above, certain stocks have shown resilience and the potential to outperform during recessions. That is, of course, not a guarantee that it will always be like that. Investment always comes with risk, especially during economic downturns. But I’m in the game for the long term anyway. I accept them as part of the game.
To give you a more generic framework, let’s explore some more general areas. This can give you even more ideas for stocks that can outperform in a recession.
Defensive Stocks
These types of stocks are exactly the ones we discussed above. They are from resilient industries like healthcare, utilities, and consumer staples. Since their products or services are all considered essential for the consumer, they fall into the category of a defensive stock.
These aren’t small companies. They are large corporations that have been around longer than I have lived on this planet. They have a proven business model and are generally profitable companies.
Dividend-Paying Stocks
Dividend-paying stocks are in high demand during a recession. They can provide a passive regular income stream, which can be especially attractive when other investments may be more volatile.
Companies with a strong history of dividend payments and a commitment to maintaining them at a good dividend yield, known as dividend aristocrats, can be a very good choice for you if you are seeking stability and income.
Of course, companies can adjust their dividend during an economic recession. We have seen this happening during the most recent COVID-19 recession. A lot of companies outright suspended their dividends. Many of them have been brought back since, but not all of them.
Technology and E-Commerce
Your first instinct might be that tech companies aren’t recession-proof. And you are right if you think about the small, non-profitable tech company. But these are not the ones that I’m talking about here. I’m not talking about Growth Stocks.
The digital economy has become increasingly integral to our lives, and during economic downturns, technology, and e-commerce companies have often demonstrated resilience.
As consumers shift towards online shopping and remote work, companies involved in e-commerce, cloud computing, and online communication tools may see increased demand. Tech giants that provide essential services, products, and innovative disruptors can be appealing options for investors.
Precious Metals and Defensive Assets
Gold and Silver are known to provide a safe-haven investment because they tend to retain their value when other assets decline. They have a reputation to act as an inflation hedge. To learn more details about that topic, head over here.
Additionally, defensive assets such as bonds and Treasury securities can provide stability and income during turbulent economic times.
It’s important to remember that the performance of stocks during recessions can vary greatly, and past performance is never a guarantee of future results.
Use Your Best Edge In The Market
What is your best edge in the market? It’s time!
You can use the time to your advantage! Every recession will come to an end. All it takes is time. This is the most important fact to take away from this post.
If you concentrate on investing in good companies, they will survive an economic downturn. You can protect your investment portfolio with diversification and risk management.
Take a recession more like a learning opportunity. Try to keep your emotions under control and prevent fear from being in the driver seat.
I am not adjusting much in my portfolio when a significant decline comes around. I invest in good companies, keep my portfolio diversified, and manage my risk. A recession opens up an opportunity to get good companies at even better prices. Chasing the best recession-proof stocks in the market just feels like a more short-term-oriented strategy for me.
Final Thoughts – Best Stocks That Can Outperform In A Recession
Nobody knows what’s gonna happen next year or 2 years from now. All we know is that, eventually, a new recession will hit. And it can put your investment portfolio under pressure. It doesn’t feel good to see your portfolio sink rapidly. I get that.
This post explores some industries that can provide good investment opportunities. They have a track record of providing more stability during a highly volatile bear market. You can use that to your advantage and find the best recession stocks for your portfolio.
Additionally, I provided some statistics about past recessions and their length. This gives you an idea about what to expect during an economic slowdown.
I firmly believe that you can achieve the best preparation for a market downturn by taking a long-term approach paired with a well-diversified portfolio. Most of your stocks will come out on the other end even stronger. Your best investments will not just be able to weather hard economic conditions but will eventually grow much bigger over time.
Disclaimer: The information in this blog post should not be considered financial advice or a replacement thereof. They are solely provided for informational purposes. Please consult a financial advisor for any specific questions on your financial situation. Also, none of the mentioned stocks are to be understood as recommendations. Don’t buy yourself something solely based on what you read here.
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