What to Invest in During a Recession

There’s no such thing as a “recession-proof” investment, but some types of stocks, funds and strategies could help your portfolio better weather the COVID-19 recession.

Chris DavisOctober 6, 2020
On a similar note...
On a similar note...
What to Invest in During a Recession

Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own.

Investing during a recession can be frightening at times, but it doesn’t have to be unnerving — if you know what to look for.

Choosing the best investments during a recession will first require you to consider your personal goals. Are you looking to:

  • Minimize downside risk during volatility?

  • Maximize long-term returns?

  • Create a source of fixed income?

  • Buy the dip to get into the stock market at bargain prices?

Building a portfolio that incorporates all these strategies may be ideal, but successfully solving for any of them could have a significant positive impact on your financial future. Take a look at the below considerations to help you put together a plan that’s right for you.

Sectors that tend to perform well during recessions

Companies that sell their shares on the stock market are broken into sectors. Sectors are groupings that pertain to the type of business the company engages in, and there are 11 sectors in total:

  1. Communication services

  2. Consumer discretionary

  3. Consumer staples

  4. Energy

  5. Financials

  6. Health care

  7. Industrials

  8. Information technology

  9. Materials

  10. Real estate

  11. Utilities

During a recession, some sectors of the economy tend to outperform others as consumer needs shift. Delia Fernandez, a certified financial planner and owner of Fernandez Financial Advisory in Los Alamitos, California, says both the health care and consumer staples sectors are examples of this.

“In any downturn environment, we often look at consumer staples. And those are the usuals, the groceries we buy and the stores we buy them from,” says Fernandez. “Because no matter what, you’re buying toilet paper, eventually you’re going to go to the doctor, you’ve got to eat, you’ve got to drink.”

These stocks, considered “defensive stocks,” may not be as attractive during boom periods like the 11-year bull market leading up to 2020. But bear markets and recessions may be the time to reassess and consider the companies that sell items everyone buys, no matter the outside circumstances, Fernandez noted.

And so far in 2020, both the consumer staples and health care sectors have outperformed the market overall. Here’s a quick look at each:

  • Consumer staples. Consumer staples include food and beverages, household and personal products and even alcohol and tobacco. When the markets plummeted in early 2020 due to coronavirus uncertainty, the consumer staples sector was one of the most resistant to the downturn. By May 5, it was only down 8.6% year-to-date, compared to the S&P 500, which was down 11.2%.

  • Health care. The health care sector, which includes biotech and pharmaceutical companies, was down only 2.1% as of May 5.

Note that these sectors typically don’t see the rapid growth that others, such as consumer discretionary or information technology, might see in the rebound and recovery phase of a recession.

Healthy companies overall

If you’re interested in investing in individual stocks during a recession, you might again look to options in the sectors outlined above. But that’s not the only criteria: Low debt, profitability, strong balance sheets and positive cash flow will all help a company get through difficult economic times.

“You’re going to look at the big guys that are going to get through this downturn and thrive and thrive,” Fernandez says.

So how do you identify those companies? One of the best places to start is to use a stock-screening tool. If you already have a brokerage account, this is most likely available on the broker’s website.

» Don’t have a brokerage yet? See our picks for the best online brokerages.

Here are some sample criteria to set in your stock screener:

  1. Set the market capitalization to “large cap” or larger. Large-cap stocks are shares of some of the largest companies in the U.S., generally with valuations of $10 billion or more. These companies tend to be more stable during volatility and have a lower risk of going out of business.

  2. Set the price performance. This is how you’ll find individual stocks that have performed better than the market overall. First, you’ll need to determine the performance of a broad market index, such as the S&P 500, for a specified period. From the numbers on this chart, we can see that as of May 5, the S&P 500 was down about 11% for the year from the close at the end of 2019. To find stocks that have performed better this year, set the price performance filter in your stock screener to show anything above -11%.

  3. Choose common stock. If you have the opportunity to filter for security type, select “common stock” to keep things simple.

  4. Select the sector. Here’s where you can input the consumer staples or health care sectors discussed above (or any others you may want to look at).

You can also opt to filter for stocks with positive dividend growth. Increasing dividends consistently can be a sign of financial strength and discipline, healthy balance sheets and consistent cash flow — all factors that can help companies withstand recessions. Be aware that this filter will limit your options to only dividend stocks, but it should present some of the more established companies that may be better able to endure difficult market conditions.

As of this writing, using the four filters above in Fidelity Investments' stock screener returned 25 results within the consumer staples sector — a manageable list that won’t leave your head spinning. Here are the top 10 results, ordered by YTD performance as of May 5.

Symbol

Company name

YTD performance

CLX

The Clorox Co.

32.53%

KR

The Kroger Co.

13.18%

GIS

General Mills Inc.

11.67%

SJM

The J.M. Smucker Co.

11.42%

WMT

Walmart Inc.

4.96%

COST

Costco Wholesale Corp.

4.76%

CHD

Church & Dwight Co. Inc.

4.38%

CPB

Campbell Soup Co.

2.95%

HRL

Hormel Foods Corp.

2.62%

CL

Colgate-Palmolive Co.

0.99%

This doesn’t mean these companies will always be strong in a recession. Always keep in mind that past performance doesn’t guarantee future results. But these are data points that might inform your eventual picks.

» Start investing: Learn how to invest in stocks.

Mutual funds that track specific sectors

Investing in funds, such as exchange-traded funds and low-cost index funds, is often less risky than investing in individual stocks — something that might be especially attractive during a recession.

Investing in funds gives you exposure to specific baskets of securities, rather than just a single investment (such as an individual stock). In times of recession, this is one way to invest in several companies in the most resilient sectors while avoiding concentrating your risk in any one company. If one company in the fund performs poorly, the strong performances of other companies can offset the losses of the underperformer.

For example, if you wanted to invest only in consumer staples companies, you could buy shares of Vanguard’s Consumer Staples ETF or the Consumer Staples Select Sector SPDR Fund. (We’re not recommending these funds, merely citing examples of this type of fund.) These funds emerged from the Great Recession bear market down 29% and 27%, respectively, while the S&P 500 was still down 52%. Both of these funds include holdings in Procter & Gamble, Coca-Cola, Pepsi, Costco and a host of other consumer staples companies.

“Most people aren’t stock pickers,” Fernandez says. “Most people are going to do better by buying an index of something and letting that index serve its purpose.”

» Want to get started with funds? Learn how to invest in index funds.

Fixed-income and dividend-yielding investments

Investors typically flock to fixed-income investments (such as bonds) or dividend-yielding investments (such as dividend stocks) during recessions because they offer routine cash payments.

Dividend stocks are shares of a company that splits a portion of its profit with all its shareholders based on the number of shares each investor owns. Investing in companies with a strong track record of paying — and increasing — dividends can lead to stable cash flow even during recessions. Another option is to invest in dividend ETFs, which comprise companies known for routinely paying strong dividends.

Even if the value of your stock is down because of the conditions, the reinvested dividends lower the volatility.

Marguerita Cheng, CFP

And while these payments can be taken out as cash and used as income, there’s another factor that makes dividends more appealing during times of volatility, according to Marguerita Cheng, a CFP and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

“The benefit of investing in dividend-paying stocks, mutual funds or ETFs is that the dividends can be reinvested. Even if the value of your stock is down because of the conditions, the reinvested dividends lower the volatility,” Cheng explains. “Let’s say the stock market is down 10%, but that stock you have pays a dividend of 3%. If that gets reinvested, you don’t experience as much downside.”

When searching for dividend-paying stocks, it’s important to note that yield shouldn’t be the biggest determining factor, as the highest yields tend to come with additional risk. Rather, look for consistency in paying or increasing dividends, which is indicative of good corporate governance.

» Want to get started? See our list of 25 high-dividend stocks and learn how to invest in them.

Bonds (and many bond funds) are similar in that they make periodic payments over time, but the mechanics are different. Bonds, whether issued by the U.S. government or a corporation, are essentially a loan. You give a specific amount upfront to the company or government, and in return, you receive interest on that amount over a set period of time. Plus, if you don’t sell the bond before it matures, at the end of the period you’ll get back the initial amount you invested. In some cases, you might also choose to sell the bond to another investor on the secondary market before its maturity date.

The differences between corporate and government bonds are explored in-depth in our list of safe investments.

Above all, don’t panic

Recessions and volatile markets can be frightening times, but if you’re investing for the long term, what’s most important is to keep an even keel. In many cases, the best thing to do may be nothing at all — to trust the market’s resilience and the diversification you’ve built into your long-term portfolio.

View Morningstar's top stock picks 

With a 14-day free trial* of Morningstar Premium, you'll get up-to-date expert stock research to help drive your investment decisions.

*Paid subscription thereafter, see Morningstar.com for details.

We want to hear from you and encourage a lively discussion among our users. Please help us keep our site clean and safe by following our posting guidelines, and avoid disclosing personal or sensitive information such as bank account or phone numbers. Any comments posted under NerdWallet’s official account are not reviewed or endorsed by representatives of financial institutions affiliated with the reviewed products, unless explicitly stated otherwise.