Financial planners and advisors have a reliable playbook during periods of market volatility and recessions. But you’d be hard-pressed to find a financial expert who claims there’s a completely recession-proof stock out there.
“I think there are stocks that tend to do better in a recession and certain sectors that tend to do better,” says Robert M. Wyrick Jr., managing member and chief investment officer of Post Oak Private Wealth Advisors in Houston, Texas. “But I don’t know if I would call any of them ‘recession-proof.’”
A better strategy for buying stocks may be to examine the characteristics of stocks that tend to perform better than others during a recession, and use this information to build a portfolio that’s ready for anything — recessions and all.
Historically recession-resistant sectors
The stock market comprises 11 sectors, each made up of businesses that operate in similar industries. Xerox, Apple and Microsoft, for example, are all in the technology sector, while Boeing, General Electric and Caterpillar are all in the industrials sector.
“Usually if a stock is acting in a resilient manner during a recession, then it’s going to be part of a larger group of stocks that have similar characteristics,” says David McInnis, a certified financial planner and co-founder of East Paces Group in Atlanta.
One way to use this sector segmentation to your advantage is to tactically align your portfolio to include exchange-traded funds and index funds that track sectors that have historically outperformed during down periods, so you're ready for anything the market brings.
So what sectors might those be? Historically, consumer staples, health care and utilities. Below, we take a deeper dive into each, and look at which specific stocks have performed well so far in 2020. These companies are ranked within their respective sector by year-to-date returns, and the list includes only large-cap S&P 500 companies.
During recessions, consumers tend to pull back spending on discretionary or luxury purchases, but they’ll continue purchasing items they may need every day — think food, beverages, household and personal products, tobacco and similar items. The companies that supply these products are in the consumer staples sector. The best-performing consumer staples stocks so far this year are:
The Clorox Co.
General Mills Inc.
The Kroger Co.
Monster Beverage Corp.
Health care stocks tend to be safer during recessions for the same reason as consumer staples: The services and products they offer are always in demand. This sector includes companies in the biotech, pharmaceutical and health care equipment industries, as well as health care providers and services. Year-to-date, the best-performing health care stocks are:
Regeneron Pharmaceuticals Inc.
Vertex Pharmaceuticals Inc.
Eli Lilly and Co.
Idexx Laboratories Inc.
Demand for utilities services can generally be expected to hold even during recessions. These stocks include companies that ensure delivery of electricity, water and gas as well as independent power and renewable electricity providers. These are the top-performing utilities stocks so far in 2020:
American Water Works Company Inc.
NextEra Energy Inc.
Dominion Energy Inc.
Xcel Energy Inc.
Stock performance current as of June 19, 2020.
Technology stocks: The new consumer staple?
Consumer staples have long been regarded as an obvious investment choice during recessions. But during the pandemic-driven volatility, new players emerged: technology stocks. During this particular recession, tech has become almost as indispensable as toilet paper.
The reason, Wyrick says, is that the tech companies that were supplying the infrastructure and hardware that enabled the extraordinary growth of the previous bull market are still providing that infrastructure, even during the downturn. Moreover, when companies inevitably cut costs during a recession, there’s one expenditure that’s likely to remain far from the chopping block: efficiency improvements.
“The one area I don’t think they can cut costs is the need to create more efficiency,” Wyrick says. “Corporate earnings have been incredible, and the profit these companies have been able to generate — even in downturns — is all technology related. And I don’t see that changing in a recession.”
But tech spending isn’t limited to the corporate world. Consumer spending on technology also ticked up during the five weeks leading up to April 4 compared to the same period in 2019, according to market research company The NPD Group. Sales of USB cameras were up 226%, monitor sales were up 113% and docking station sales were up 86%, even as the U.S. unemployment rate experienced its largest over-the-month increase since 1975.
While household names like Apple and Microsoft may be some of the most popular tech stocks, there are plenty more that have maintained momentum in 2020. Below are the five best-performing technology stocks year-to-date:
PayPal Holdings Inc.
Cadence Design Systems Inc.
Creating a diversified portfolio
While many entrenched beliefs about investing in a recession have recently been reinforced, advisors stress that this is by no means a normal recession, and there’s a chance it won’t play by normal rules.
Still, a well-diversified portfolio is one of the best ways to ensure you’re prepared for whatever turns the market takes. That means including some of the sectors mentioned above, but it also means making sure your portfolio is broadly diversified across industries.
“You generally want to think about investing in longer time periods than pre- and post-recession,” says McInnis.
The sectors that tend to outperform during a recession (like consumer staples and health care) may not see the rate of growth other sectors (like financials and industrials) could experience during the recovery phase. Too much focus on the latter, though, and you could be overly exposed to sudden market drops, as was seen in early 2020.
Protecting your investments against downturns, while still maximizing gains, requires a thoughtfully constructed portfolio that’s ready for anything, whether it’s a traditional recession or something as unpredictable as a global pandemic.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.