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 gut-wrenching 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 behavior. When the economy tanks and money gets tight for many, there are some things that people will 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 to short-term news
#4 Reinvest into your winners
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 for at least 2 consecutive quarters.
Recessions can last long and negatively impact income, employment, retail, and more. And, of course, they can impact 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.
US Recessions from 1929 to 2022
It also gives a great estimate of how long a recession usually lasts. COVID-19 was by far the shortest recession we ever had, lasting only 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 high inflation and, therefore, price hikes. 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 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 consumers can’t easily escape. 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 – Exelon Corporation can be an appealing stock during a recession due to its prominent presence in the electric utility industry.
- Duke Energy Corporation – Duke Energy Corporation can be a reliable stock during a recession as it is a major player in the electric utility sector.
- Dominion Energy, Inc. – Dominion Energy can be a solid stock during a recession because it operates in the utility sector.
- American Water Works Company, Inc. – American Water Works Company can be a dependable stock during a recession as it provides essential water and wastewater services.
Consumer Stables
The term consumer staples refers to essential products used by consumers. It includes food, beverages, household goods, etc.
Since these products are essential to everybody, they will not be easily cut from expenses. After all, people still need to eat and drink.