When a recession hits, many companies face the prospect of declining revenues and profits. But some businesses perform well even when economic times are tough. These recession-proof businesses typically provide essential services, such as healthcare, or sell vital goods, like food. People need to buy these goods and services in good times and in bad. Recession-proof industries may not grow fast when the economy is booming, but they tend to outperform others when recessions occur.
What is Recession-Proof?
A recession is a significant and broad decline in economic activity, usually lasting for at least two consecutive quarters. During a recession, customers tighten their purse strings and buy fewer nonessential products and services. As a result, many industries experience hard times during a recession. These are called cyclical industries because their fortunes ebb and flow with the economic cycle.
In contrast, other industries — especially those that sell essential products and services — are considered recession-proof because they are able to continue performing relatively well even during periods of economic contraction. These include energy suppliers, such as electric and gas utilities; providers of everyday consumer products, like food; and healthcare companies.
- Recession-proof businesses typically provide essential goods and services that customers continue to buy even when the economy contracts.
- Many recession-proof businesses are in defensive sectors, such as utilities, healthcare and basic consumer products like food.
- Investments in these industries and in assets such as bonds and gold often perform better during recessions than the broader stock market.
Many recession-proof companies provide products or services that consumers need to buy regardless of whether the economy is growing or shrinking. During a recession, consumers typically reduce spending on nonessential items, like entertainment, travel and luxury clothing.
There are a number of steps any company can to take to recession-proof their business, but everyone needs to buy food to eat and electricity to keep the lights on — even if the economy slows and paychecks shrink. As a result, demand for these goods and services remains relatively stable. That's why utilities, healthcare and grocery stores are among the industries considered recession-proof. For investors, shares in these companies are also considered recession-proof since they are among the few stocks that have historically outperformed the broader market during a recession.
Beta is a way to measure a stock's price volatility compared to the overall stock market. If a company's stock has a beta of one, its price volatility matches the overall market. Stocks with low beta are less volatile than the market. Meanwhile, investments with negative beta are inversely correlated to the broader stock market — they rise when the market falls and vice versa.
Recession-proof stocks and investments are more likely to have low or even negative beta than other stocks and investments. During a recession, the market typically falls as corporate earnings drop. But recession-proof companies are relatively unaffected, so their stock prices don't move in sync with the market. Some investments, such as gold, have negative beta — they often rise in value when stocks fall. Conversely, when the economy is expanding and the stock market is rising, shares in companies with low or negative beta are likely to underperform in the market.
Defensive industries are relatively immune to economic cycles. They are generally considered recession-proof because their revenues and profits remain fairly stable whether the economy is expanding or in recession.
Defensive industries typically provide products and services that are essential to consumers. Key defensive sectors are utilities, consumer staples, healthcare and telecommunications. Consumer staples are goods and services that people use every day. For example, most consumers need to buy food at grocery stores, but they don't need to eat at restaurants — so grocery stores are considered to be part of a defensive industry but restaurants are not.
Recession-Proofing Your Portfolio
Businesses and investors seeking to protect their investments against the impact of a recession can do so in several ways. One step is portfolio diversification: adding stocks or other financial assets that traditionally perform well during a recession. These could include shares in companies in defensive industries that are relatively unaffected by economic downturns, like utilities and health care. Mutual funds and exchange-traded funds (ETFs) that invest in those sectors are also available. Other potential investments include government-issued bonds and gold, which traditionally perform better than the stock market during recessions. It may be advisable to hold enough cash to cover any immediate needs and potential emergencies.
A recession-proofed portfolio has pros and cons. During a recession, it may outperform a portfolio that focuses on riskier high-growth stocks and other assets. However, it may underperform during economic expansions, and finding a balance between conserving capital and investing is crucial.
Examples of Recession-Proof Assets
Some assets typically are resistant to the negative impacts of a recession. Here are some common examples:
- Bonds. Government-issued bonds are considered relatively safe investments because of their low risk of default. They pay a guaranteed interest rate, which can be particularly attractive when many other assets are falling in value.
- Gold. This element is traditionally seen as a "safe haven." Investors flock to gold when the economic environment is uncertain, so its price often rises.
- Cash. Maintaining a portion of a portfolio in cash has several advantages. It's low-risk and ensures that liquid funds are available if the business needs them, such as when new investment opportunities arise. In addition, some recessions are deflationary — prices actually fall — so the purchasing power of cash increases over time.
- Stocks. Even when the stock market declines in a recession, shares in some companies can be attractive assets. They include companies in defensive sectors, such as utilities, healthcare and supermarkets. Companies that have large cash reserves and pay regular dividends can also provide good investment returns during a recession.
Some businesses typically weather recessions better than others. They're often companies that meet people's basic needs. For example, businesses providing groceries, home and vehicle repairs and discounted everyday consumer products often do well during a recession.
- Utilities. Utilities generally remain stable during recessions because consumers make paying their utility bills a priority. Water utilities, gas and oil companies, waste management firms and companies involved in building and maintaining utility infrastructure can all do well during recessions.
- Grocery stores. Everyone needs to buy food — and purchasing it at grocery stores is less expensive than eating out, so supermarkets are considered recession-proof.
- Budget retailers. Stores focused on bargain-hunters can fare well. Discount and warehouse retailers, dollar stores and thrift stores can outperform retailers selling designer clothing and other expensive items when the economy is tough and consumers' budgets are pinched.
- Healthcare services. Many healthcare services are essential, so companies throughout the healthcare industry tend to weather recessions well. They include hospitals, insurers and makers of pharmaceuticals and other medical products.
- Baby products and childcare. Babies need food, clothing, bedding and toys. And for working parents, childcare is essential.
- Home and automotive repair. People need repair services when their home plumbing springs a leak or their car breaks down.
- Alcohol and other vices. People may still be willing to pay for indulgences, like alcohol, candy and gambling during a recession.
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Some businesses survive and even thrive during recessions. These recession-proof businesses typically provide essential goods and services in sectors such as healthcare, utilities and consumer staples. Understanding how businesses withstand economic downturns can help managers position for tough times and create defensive portfolios that outperform the broader market.
What industries are recession-proof?
Industries that provide essential goods and services are typically recession-proof. Electric and gas utilities, grocery stores and doctors' offices are all examples of businesses that tend to be recession-proof.
What industries are hit hardest by a recession?
Industries that grow and shrink in step with the economy are hit hardest by a recession. They include homebuilders and other companies involved in construction. Also hurt by recessions are companies that sell discretionary goods and services that consumers can live without. Restaurants, retailers selling expensive clothing and the travel and tourism industries may suffer.
What constitutes a recession?
A recession is a significant decline in economic activity that is spread across the economy and lasts for months or even years. It is reflected in metrics such as shrinking gross domestic product (GDP), falling retail sales and rising unemployment. Most recessions last for at least two consecutive quarters.
What is meant by recession-proof?
A recession-proof company is one that continues to thrive when the economy declines. Many recession-proof companies offer essential goods and services such as healthcare, electricity and food. An investment or asset that's recession-proof will retain its value or outperform the broader stock market during recessionary periods.
How do I make myself recession-proof?
One way to recession-proof your career and finances is to consider finding a job in an industry that isn't negatively affected by recessions, such as healthcare or utilities. Also consider paying down debts with high interest rates, identifying ways to cut expenses and building an emergency fund just in case you are laid off from your current job.
What jobs are recession-proof?
Jobs in industries that provide essential goods and services tend to be recession-proof. In the health care industry, nurses, doctors, physical therapists and X-ray technicians are all examples of recession-proof jobs. Auto repair mechanics can do well during recessions because cars break down regardless of the state of the economy. Teachers, firefighters and law enforcement jobs are usually more stable than many private-sector jobs, but they can be subject to cuts if government revenues fall.