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Financial advisors have a reliable playbook during periods of market volatility and recessions, and many have started to turn to it as fears of a pending recession increase. Still, you’d be hard-pressed to find a financial expert who claims there are completely recession-proof stocks out there.
Here's a quick overview of what industries tend to fair better during market turbulence, and why keeping an eye on your portfolio's diversification may be the most solid game plan of all.
Are any stocks recession-proof?
“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.’”
Every recession is different, and every economic situation is different, he says.
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.
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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.
In 2022, many of the best-performing stocks have been in the energy sector, such as Occidental Petroleum, Valero Energy and Chevron.
» Learn more: See our list of best-performing stocks
One way to use 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.
Historically, stocks in the consumer staples, health care and utilities sectors have fared well during recessions.
During typical recessions, consumers tend to pull back spending on discretionary or luxury purchases, – things such as entertainment and dining out – 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.
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.
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.
Why these three sectors? It's due to inflation, Wyrick says. Think about a family of four, he says — rising inflation causes the price of necessities such as food and gas to go up.
“Families really start to feel that pinch. When that happens, something has to give in terms of a lot of people's budgets.”
But consumers still have to spend money on health care, they still have to pay their utilities, and they still have to eat.
» Need to back up a bit? Read our explainer on what inflation is and why it's surging
Other stocks to consider in a recession
There are certain companies in any sector that make sense to invest in now, Wyrick says. You just have to do your research. Look at their earnings. Growth is great, but companies that produce a consistent revenue stream can be even better in a volatile market, he says.
That includes companies that have a good foundation, solid earnings and are trading at reasonable prices, but aren’t Wall Street darlings just yet.
» Ready to look around? Find undervalued stocks on the rise
Tech stocks were hot during the 2020 recession. The reason, Wyrick says, is that the tech companies that were supplying the infrastructure and hardware that enabled the growth of the previous bull market were still providing that infrastructure, even during the downturn.
But the current environment is different, he says. Having some exposure to technology still makes sense, but not to the degree of 2020. Investors should be selective and focus on companies with consistent earnings.
There is no perfect recession-proof stock, he says. Which brings us to the real recession-hedge: diversification.
Creating a diversified portfolio
A well-diversified portfolio is one of the best ways to ensure you’re prepared for whatever turns the market takes, financial advisors say. That means including some of the sectors mentioned above, but it also means making sure your portfolio is broadly diversified across industries.
The sectors that tend to outperform during a recession (such as consumer staples and health care) may not see the rate of growth other sectors (such as financials and energy) could experience during the recovery phase. Too much focus on the latter, though, and you could be overly exposed to sudden market drops.
“It's important that investors don't start chasing those returns, and not get too heavily weighted on any particular sector," Wyrick says.
Protecting your investments against downturns, while still maximizing gains, requires a thoughtfully constructed portfolio that’s ready for anything, even a recession.
The bottom line on recession-proof stocks
There are no fully recession-proof stocks. Some sectors, such as consumer staples, health care and utilities, have historically done better than the broad market during recessions. Advisors also point to value stocks and commercial real estate as potentially advantageous investments during downturns.
But ultimately, preparing your portfolio for a recession is a matter of not putting all of your eggs in one basket. A diversified portfolio may not be fully recession-proof either — but it's the good bet for most investors.
» Learn more: Stocks, funds and investment strategies for a recession