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The short version

  • Though there is no such thing as a truly recession-proof industry, some industries are more recession-resistant than others.
  • Recession-resistant industries are industries that have a better chance of doing well during a period of economic decline.
  • Examples of recession-resistant industries include fast food, discount retailers, grocery stores, consumer staples, healthcare, and precious metals.
  • Diversification and investing in companies with solid fundamentals can also help your investment portfolio weather a recession.

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What is a recession-resistant industry?

The industries listed below are considered “recession-resistant,” but not “recession-proof,” since no industry is ever really 100% recession-proof. Recession-resistant sectors are not entirely immune to recessions — instead, they are more likely to remain stable during a downturn. For example, staples consumers always need, such as groceries and household products. Or even the precious metals industry since some investors put their money into gold to hedge against economic downturn.

Note that just being in a recession-resistant industry alone doesn’t make a company a great investment: it also needs to have a strong balance sheet and consistent profit margins to survive a recession. Even if a company is in an industry that is not recession-resistant, strong fundamentals may help it weather the storm much better than its peers with weaker fundamentals.

More: What can I do to protect my investments from a market downturn?

The nine best recession-resistant industries to invest in

Below are some industries with recession-resistant characteristics due to the nature of their business. Please note that there is no guarantee that these industries will perform well during the next recession.

1. Fast food

Even when times are tough, people still go to fast-food restaurants for meals. Fast-food chains with solid financials and a wide selection of wallet-friendly menus could be a good defensive pick for your portfolio during a recession. For example, McDonald’s (NYSE: MCD) performed relatively well compared to other stocks during the 2008 recession. In fact, McDonald’s experienced sales growth in 2008 and opened nearly 600 stores.

2. Discount retailers

During the 2008 global financial crisis, one of the S&P 500's best-performing stocks was Dollar General (NYSE: DG). Shares of the discount retailer rose by 60% in 2008, which was nearly double the returns of the second-best-performing stock that year. In sixth place was Walmart (NYSE: WMT), making discount retailers the only industry with two stocks in the top ten. Like fast food, discount retailers do well because they provide an inexpensive option when many people are penny-pinching.

3. Grocery stores

Even during a recession, most consumers simply cannot do without groceries. Unless you are self-sufficient and grow your food, most people still need to visit a grocery store. If you’re in America, chances are there is a Costco (NASDAQ: COST) or Kroger (NYSE: KR) that you go to fairly regularly. Costco locations require a membership, but Kroger operates several different grocery chains around the country.

4. Consumer staples

Most of us regularly buy consumer staples like toilet paper, toothpaste, soap, and shampoo. Even during a recession, consumers continue to stock up on these staples. Procter & Gamble (NYSE: PG) is an example of a popular consumer staple stock. P&G is a global consumer conglomerate including brands such as Gillette, Dawn, Febreeze, Always, Crest, Tide, Oral-B, and Pampers, to name a few.

5. Healthcare

Healthcare is generally a priority even during a recession. Popular stocks in this industry include brands like Johnson & Johnson (NYSE: JNJ) and Walgreens (NASDAQ: WBA). Healthcare doesn’t necessarily have to be about medical technology or pharmaceutical biotech companies. At its basic level, healthcare is prescription services and over-the-counter products like BandAids and Tylenol. In other words, things that we use every day to maintain our health and well-being.

6. Precious metals

Some precious metals like gold typically retain their value during recessions. Investing in precious metals like gold comes in many shapes and forms. You could invest in gold ETFs such as iShares Gold Trust (IAU) or even invest in physical gold bullion itself. And If you want physical gold, you can buy gold bars at a precious metals dealer.

7. Utilities

Utilities are companies that provide essential services like water, gas, and electricity. During a recession, people may cut back on spending in other areas, but they typically don't skimp on utility bills. American Electric Power (AEP) and Southern Company (SO) are two of the largest electric utility companies in the United States.

8. Debt Funds

If you’re looking for stable income during a recession, you might want to consider investing in debt funds. These funds invest in a variety of debt instruments, including government bonds, corporate bonds, and mortgage-backed securities. Some popular debt funds include the Vanguard Total Bond Market Index Fund (BND) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD).

9. Banking & financial services

There are a few reasons banking is typically considered a recession proof industry. First, people will always need access to financial services like loans and savings accounts. Even in tough economic times, people still need to borrow money for big purchases or tide them over during tough periods.

Second, banks tend to be large and well-established institutions with a lot of resources to weather tough times. Finally, the government often steps in to help prop up the banking industry during economic downturns (as they did in the aftermath of the Great Recession) since a strong banking system is critical for a healthy economy.

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Building a recession-resistant portfolio

Another way you can help your portfolio become recession-resistant is to make sure your investments are diversified. This could mean balancing defensive and growth stocks or adding fixed-income assets like bonds.

As alluded to earlier, when choosing stocks for a recession-resistant portfolio it may make sense to look at companies with solid fundamentals. Stocks trading at reasonable valuations could perform better than stocks trading at high multiples during a recession.

Companies with long track records of consistent performance and profitability might also be more resilient than companies just starting out and trying to capture market share. Attractive stocks have characteristics like long track records, profitability, and reasonable valuations, regardless of the economy.

During a recession it's also a good idea to have cash handy. That way when the market is down you can potentially buy stocks at depressed levels. But note that timing the market is challenging at best.

Another way to protect your portfolio in a recession is to implement hedging strategies. Two popular strategies are to buy inverse ETFs or put option contracts. Inverse ETFs track the major indices and move in the opposite direction: they gain when the indices they track go down in value. Put options allow you to sell a stock at a specific price for a certain period of time. Thus, as the value of the underlying stock goes down, the value of the put option goes up. Buying a put option on a stock effectively allows you to short it and can serve as a hedge in an investment portfolio.

More: How to diversify your investment portfolio

The bottom line

Recessions are painful periods for the economy and investors. But one way to soften the impact is to add recession-resistant industries and stocks to your portfolio.

Remember, recession-resistant industries aren't entirely immune to the effects of a downturn. But by building a recession-resistant portfolio, you can minimize your losses and be prepared when the market swings upward again.

Disclaimer: The content presented is for informational purposes only and does not constitute financial, investment, tax, legal or professional advice. If any securities were mentioned in the content, the author might hold positions in the mentioned securities. The content is provided “as is” without any representations or warranties, express or implied.

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Jay Wu, CFA Freelance Contributor

Jay Wu is a freelance contributor for Moneywise.


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