Nothing is truly recession-proof, including stocks, but some sectors tend to be safer during economic downturns. Certain industries, like health care, consumer staples or defense stocks, historically perform better during recessions. If an investor wants to put money into stocks during a recession, focusing on these industries can be a viable strategy.
Wise Takeaways
- Larger companies with consistent revenues and dividends are often favored during recessions due to their historical stability and reliable income streams.
- Essential industries like health care, utilities and consumer staples are often viewed as resilient options for recession-proof stocks.
- Dividend-paying stocks with strong balance sheets may offer the most consistent cash flows.
- Diversification and ETFs in defensive sectors are commonly used strategies for added stability during economic downturns.
Historically resilient sectors during recessions
When assessing "recession-proof" stocks, investors often look at how essential a company's products and services are. As consumers cut back on spending during recessions, businesses that provide necessities (like health care and consumer staples) tend to hold up.1 By contrast, stocks and industries tied to economic growth often take a hit.
Health care stocks
Health care is often considered a safe haven during economic downturns because medical needs don’t disappear when the economy slows. Demand for medications, devices and procedures persists during recessions. Established pharmaceutical firms and health insurers with consistent revenues and dividends tend to be more resilient during recessions.
However, not all health care stocks are considered safe havens. Emerging biopharmaceutical companies can be more volatile.
Consumer staples stocks
Consumer staples include essential products like food, beverages, personal care items and household goods — things people buy regardless of economic conditions. While consumers may cut back on luxury purchases during a recession, they still need to eat, clean and maintain hygiene, keeping demand for these products steady.
Though consumer staples stocks may not offer high returns, they are often seen as a safe option because they can offer stability and lower volatility during economic downturns.
Utilities stocks
Utilities are essential services like electricity, natural gas and water — necessities that households and businesses continue paying for regardless of economic conditions. Operating in highly regulated markets with long-term contracts, utility companies benefit from steady cash flows and reduced volatility.
Many utility stocks also offer attractive dividends, making them appealing during recessions. While they may not deliver high growth, their stability makes them a reliable option for conservative investors seeking resilience in downturns.
Discount or value retailers
Discretionary spending may decline during recessions, but people don’t stop shopping altogether, they just become more budget-conscious. This shift often benefits discount retailers, as consumers look for lower prices and better deals. Even higher income shoppers may turn to value retailers during downturns, boosting foot traffic even more.2
Defense and security stocks
Defense budgets are generally less affected by economic conditions, as governments typically continue investing in military equipment, cybersecurity and homeland security. In fact, global tensions often drive increased spending in these sectors.3
Established defense and security companies benefit from long-term government contracts. With ongoing concerns over cyber threats and global conflicts, demand for defense technology and security solutions is unlikely to slow, making this sector a potentially resilient option during recessions.4
Walmart: A Case Study in Recession-Resistant Stocks
Walmart may be considered a defensive stock, thanks to its position as a low-cost retailer that sells essential goods. When economic downturns force consumers to cut back on discretionary spending, many shift their shopping habits toward budget-friendly retailers like Walmart, helping the company maintain steady revenue and stock performance.
During the 2008 financial crisis, Walmart’s stock initially climbed significantly as the recession began, reflecting its position as a defensive retailer that benefited from increased consumer demand for essential goods. The stock started at $15.84 at the beginning of the recession and peaked at $19;96 in September 2008 as market uncertainty drove investors toward more stable companies. As the economy began to stabilize and investors shifted focus back to riskier growth stocks, Walmart’s stock dipped, ending the recession at $16.15. The chart below displays Walmart’s stock price during the 2008 financial crisis.
In early 2020, when the pandemic-driven recession caused a rapid market sell-off, Walmart’s stock experienced only a brief dip before quickly rebounding and continuing an upward trajectory through the recession. Unlike in 2008, Walmart saw sustained growth as demand surged for groceries, household essentials, and e-commerce services. The stock started at $35.89 at the beginning of the recession and ended at $40.52, reflecting its ability to thrive in uncertain economic conditions. The chart below displays Walmart’s stock price during the COVID-19 recession.
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A look at Walmart's stock history
Walmart has a long history of steady growth and resilience, as shown in the chart below. Its low-price model and broad consumer reach have helped the stock perform reliably across econonmic cycles, including during recessions.
Steps to recession-proof your stocks
No portfolio is entirely recession-proof, but you can take steps to make yours resilient. By focusing on essential industries, diversifying your investments and analyzing key financial metrics like balance sheets and dividend history, you can better position yourself to withstand economic downturns.
Create a diversified portfolio
No matter how confident you are in a particular company or sector, spreading your investments reduces risk. Diversification helps ensure that a single underperforming stock or industry doesn’t derail your portfolio. Balancing different risk profiles, such as growth and income stocks, also creates a more stable investment mix.
If picking individual stocks feels overwhelming, consider exchange-traded funds (ETFs) or mutual funds focused on recession-resistant sectors like health care, consumer staples or defense. While these funds come with management fees (expense ratios), they provide instant exposure to a broad range of assets, reducing risk.
Consider companies with strong balance sheets
Holding on to unprofitable growth stocks or debt-laden businesses can be risky in a recession. Companies with strong balance sheets, including low debt, high cash reserves and steady cash flow, may be safer options. These firms are more likely to weather economic downturns and even capitalize on opportunities by acquiring weaker competitors.
Companies with healthy financials are more likely to survive, and even potentially emerge stronger, rewarding shareholders in the long run.
Look into large-cap and small-cap stocks
During recessions, large-cap stocks are often seen as more stable due to their size, diversified revenue streams and global influence. These companies typically have the resources to navigate economic uncertainty and maintain investor confidence.
However, historical data suggests that small-cap stocks tend to struggle heading into a downturn, they often outperform large caps during the recovery phase. As market conditions improve, small caps have been shown to experience stronger earnings growth and valuation rebounds, making them a potential long-term opportunity.5
Evaluate companies with consistent dividends
Dividends provide stability, especially during economic downturns. While a high dividend yield shouldn’t necessarily overshadow a company’s overall financial health, steady payouts can be a strong indicator of resilience.
“Dividend aristocrats” are companies that have raised dividends for at least 25 consecutive years. They are particularly attractive for investors seeking reliability. While dividends alone shouldn’t drive investment decisions, firms with strong fundamentals and consistent payouts can offer a cushion during recessions.
FAQs
Eric Esposito is a freelance contributor on MoneyWise with an interest in financial markets, investing, and trading. In addition to MoneyWise, Eric’s work can be found on financial publications such as WallStreetZen and CoinDesk. When not researching the latest stock market trends, Eric enjoys biking, walking his dog, and spending time with family in Central Florida. Eric holds a BA in English from Quinnipiac University.
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