In a recession, the stocks that tend to perform well are those from the sectors of consumer staples, healthcare, utilities, discount retailers, and telecommunications as their products are vital. For example, during the 2008 financial crisis, Walmart’s stock went up by 20%, which proves that they are recession-resistant because consumers turn to affordable options . Healthcare companies, such as Johnson and Johnson, had only a minimal decrease comparing to the broader markets due to the need in medical products and services .
Consumer Staples
Consumer staples have a positive exposure to an economic environment that can be classified as a recession. The reason is that the group of goods, which could be referred to as necessary consumer staples, requires annual purchases. Non-durable goods, such as food and beverages or household products, are part of any consumer’s budget, and while they might decrease their purchases in discretionary categories, they would continue to acquire necessary items . One of the best examples of how that phenomenon occurred was the socio-economic environment of 2008-2009. The data from Morningstar shows that the S&P 500 fell by 38%, and that led to a considerable decline in purchasing and investing by the USA population for a variety of luxury items. However, the decrease in value of Procter & Gamble was closer to 15%. The same pattern could be watched throughout that time with Coca-Cola and many other companies in this sector.
As could be seen from the data presented above, companies like these did not stop their sales and delivered a satisfactory amount of profit in revenue. On top of that, they maintained their dividend payments, which was essential for investors who have chosen their stocks as a way to keep their monthly income stable . In the same 2008, where the whole market was suffering, Walmart was fancying rapid revenue increase, which came along with consistent stock price rise.
Consumer staples are highly demanded by investors not only for the abovementioned reasons but also due to the high dividend yields. The company’s stock investments are less risky, and they provide two different income streams. As of the end of 2021, Procter & Gamble’s dividend yield is 2.4%, and for Coca-Cola is 3.1% .
Healthcare
Healthcare stocks are one of the safest options to invest in during economic downturns. Many medical services, products, and healthcare-related innovations are not discretionary options, and while statistically, their stocks might decrease in value, many other companies and stocks will experience losses on a significantly larger scale. People do not stop needing medical care, vaccines, and pharmaceuticals due to the economic recession.
To illustrate, in 2008-2009, one of the most widely recognized stocks, Johnson & Johnson , experienced a decrease in value by less than 9%. The broader US stock market, or S&P 500 index, fell by around 38% . Another popular stock is Pfizer, a wing of the company that features an enormous selection of pharmaceutical products. In 2008, its stock value experiences changes similar to those of J&J.
Pharmaceutical stocks such as Pfizer always see demand for their drugs since these products are vital to the daily lives of millions of people and often offer high-quality medical care during health crises. For instance, despite the 29.9% decline in consumer confidence due to the crisis, Pfizer only lost 1% of its revenue . However, many other sectors saw dramatic decreases in income.
A significant amount of healthcare company stocks are highly volatile due to the fact that many healthcare companies invest in the development of new drugs. Biotechnology companies such as Gilead Sciences and Merck depend heavily on their laboratories. Their stocks’ fluctuating valuations can lead to potentially high losses, but companies often experience stock and revenue increases if they develop and begin to produce successful treatments. Overall, many investors choose to invest in healthcare stocks due to their safety in the form of stable dividends and the potential for growth due to the introduction of new treatments.
Utilities
Utilities are a traditional type of recession-resistant investment due to their revenue stability. These companies provide people with services that are impossible to live without—electricity, water, gas. Socioeconomic conditions do not affect the level of utility services demand, so the companies of this sector remain immune to the most severe results of recessions. At the same time, utility stocks are in high demand during economic downturns.
For instance, utility companies did not suffer during the 2008-2009 financial crisis, thanks to their superior stability. Even as the rest of the market plunged, Southern Company ‘s stock barely budged. At the same time, the less stable industries experienced unprecedented drops. Duke Energy’s consistent demand for its service base ensured the stable performance of this stock, while other companies continuously lost their stock value.
Practically all utility services are regulated, meaning that companies of this sector do not have to deal with unregulated costs. Utility prices and sometimes even budget tariffs fluctuate, guaranteeing steady revenues. Duke Energy’s revenue stream from the 2008 period shows just how stable these payments can be uneceptible to the market conditions. Its 2008 financial statements showed only slight fluctuations and did not display any sign of change due to the recession.
The main benefit of utility stocks lies in their shares guaranteed by oil and gas assets and against the fluctuation of the market and inflation. Many of these companies traditionally pay dividends. Dominion Energy or Pacific Gas and Electric shares’ stable feature is a history of regular rewards, ensuring the lack of alternatives. In the 2008 period, Dominion Energy retained a dividend yield of about 4% when most stocks significantly reduced their payments.
Discount Retailers
Discount retailers perform well during recessions, as consumers become more price-sensitive and adjust their shopping behaviour.
Thus, companies like Walmart, Dollar General, Costco, and other similar retailers begin to perform better as stricken shoppers direct their limited money to stores that offer the best value.
Walmart is among the top performers that illustrate this phenomenon, as shares of the company gained about 20% in 2008 while the S&P 500 plummeted.
The reason for this is that Walmart’s low-pricing strategy appealed to people who no longer wanted to spend money. Their experience is reflected in the company’s statistics, for instance, showing that their revenue in 2008 grew by 7%, demonstrating that more people shopped there and spent more money despite the recession. Similarly, Dollar General saw considerable growth during the Great Recession, with their statistics showing a 13% revenue increase. Their business model, which involves selling cheap merchandise in small neighbourhood stores, matches the needs of shoppers in economically turbulent times, looking for something convenient and relatively cheap.
Additionally, Costco performs well because its customers are already paying for memberships, meaning that the losses are limited even if their members stop shopping there or take a smaller shop. Conversely, especially during the Great Recession, people flocked to the stores of these resellers to buy in bulk, which often translated to fairly significant savings, especially on non-perishables . As a result, Costco saw an increase in the number of membership subscriptions and sales even during previous recessions.
Investors choose to buy the shares of these resellers because they not only generate revenue but often enjoy greater flow of customers, as people will flock to cheaper stores in times of recession or depression. Moreover, these discount retailers enjoy the capacity to offer remarkable discounts and maintain healthy supply chains, making them the best companies to invest in during recessions.
Telecommunications
Recession tends to be a period, during which telecommunications stocks are a reasonable option because the services of communication tend to be considered as necessary by both consumers and businesses. The main reason to believe is that Verizon and AT&T are well-known wireless companies that tend to perform well during the recession. The major revenues are generally generated in voice, data, and internet services . For example, in 2008, while the world was faced with the global crisis, the wireless network providers proved their stability as providers of essential services.
While other sectors experienced a loss, AT&T also lost money, but it was the 2.5 % drop in revenue and not the 25-30 % percentage decline of other industries . The point is that communications tend to be a priority for Americans in different life situations when people are constantly moving and changing their locations.
In 2008, the dividend at Verizon, which generates only 70 % of its revenue from mobile services, dipped a little in 2008, only turning the gain to 6% . As with people, during the COVID 19, the economic downturn stirred up the demand for the internet and higher speeds of services.
The recession caused such a situation because people were unable to work and coordinate in their workplaces. Overall, people still needed to work and constant data connection and demand for working communications services. Finally, the most crucial fact, that supports the conclusion about the recession period being beneficial for telecom providers is the fact that people are generally more home-based and need more IoT services. That is why investors would also generally feel safer in recession times due to the high dividend-paying stocks.
Gold and Precious Metals
Gold and precious metals are among the most popular assets used in times of a recession since they are “safe-havens” that people believe will hold or increase their value regardless of the changes in economy. In addition, when stocks and bonds fail, investors turn to gold which shows off its status as a reliable store of value.
2008 financial crisis led to a visible surge in gold’s value. The yellow metal which was priced at 2007 close to $800 per ounce, ended 2009 at over $1,100 per ounce which made an increase of approximately 38% . Thus, when stock market turned bearish and the years of inflation expectations followed, investors turned to gold as a hedge and an asset class that refused to bend under the pressure.
When it comes to silver and other precious metals, the scenario remains the same. They might be more volatile than gold, but they usually follow the latter’s lead and present investors with a good source of profit. Starting at about $11 in 2009, the price of silver climbed to around $17 by the end of the year and represented a very decent investment option for the people who decided to trust their money to this precious metal.
It is important to note that buying and selling of gold and precious metals is much broader than simply dealing with physical coins and bars. Investing options include gold mining companies like Newmont Mining and Barrick Gold or Gold Shares ETFs like “SPDR Gold Shares” . These companies help investors make benefit if they believe in the prospect of gold without purchasing the metal itself. Overall, the reasons why people turn to gold during downturns are simple:
they are a safe asset that hedges both inflation and depreciation of the dollar. The mix of safety, relative liquidity and possibility of positive changes is the reason why gold and precious metal remain one of the most popular investment options during a recession.
