The word ‘recession’ feels scary for some. But the truth is, it’s a fairly regular economic occurrence. Of course that doesn’t mean a recession doesn’t cause serious, painful problems for many. It does, however, mean it’s an expected outcome during the economic cycle.
So that should provide a bit of relief to those worried about its impact. Plus, by its very nature, a recession is temporary. So it doesn’t necessarily signal a doomsday for businesses, or provide proof that the sky is falling. And even when we’re in the middle of one, it can actually be possible to find some stocks more likely to be recession-proof than others.
The million-dollar question on the lips of many investors now is how to pick these supposed ‘recession stocks’ or, beyond individual firms, recession-proof businesses and industries.
While no company or sector is wholly guaranteed to be immune to an economic downturn, some are more likely to weather the storm than others.
A recession happens when there are two consecutive quarters of a shrinking or contracting economy, measured using gross domestic product (GDP) figures. GDP is a useful measure that looks at the size and overall health of an economy. It measures either the total value of goods and services produced, or total spending and consumption.
So, if you see headlines of two straight quarters of negative GDP growth, expect to see the recession label slapped on.
In the US they tend to stick to the two quarters measurement but the National Bureau of Economic Research (NBER) actually defines a recession as "a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales".
Whether or not a recession is coming in 2022 has been a question borne out of high inflation and rising interest rates on both sides of the Atlantic.
By the definitions we’ve used above, the US is in a recession in 2022.
A 2022 US recession does not guarantee the UK will follow suit, as we’ve only had one quarter of negative GDP growth this year.
However, it’s looking very likely and the Bank of England has already warned that a UK recession in 2022 is inevitable.
Recessions are a normal part of the business cycle but the worry is that we could see a rise in unemployment, which could have knock-on effects for the rest of the economy, not to mention the lives of those who could lose jobs.
Recessions can come in all shapes and sizes.
It also depends on what period you’re looking at. Given the availability of data post-1900s, let’s take a look at the length of recessions since then:
So, you can see that the average lengths are fairly similar, lasting just over a year. But, you shouldn’t extrapolate and make assumptions. For example, there’s a huge difference between six months and 43 months.
One thing is for certain, no two recessions are ever exactly the same in either cause or effect. It’s impossible to predict how long the 2022 US recession will last, it may spill over into next year or it may not.
Although we can take on board lessons from the past, it’s always important to remember that events are likely to unfold in their own unique way.
As we’ve said, the textbook definition of a recession is two consecutive quarters of negative GDP growth.
However, there is a recent ongoing debate about whether this measure is a true reflection of the state of the economy. The NBER uses many different indicators for signalling a recession, though the main ones relate to GDP and employment levels. But NBER also incorporates factors like retail sales or consumer spend into its decision. Because of all these components, the US has said it’s not yet in a recession.
The simple answer is that every recession is different.
How a business or industry performs during a recession will partly depend on what caused the downturn in the first place.
For example, the ‘Great Recession’ of 2008 was triggered by a housing meltdown. So, real estate didn’t perform too well in the following few years.
While those housing prices eventually did bounce back, there are certain stocks and industries that tend to hold up well throughout the entire course of a recession too.
A recession-free stock, or one that is guaranteed not to be hit by the recession doesn’t exist.
In theory, recession-proof stocks are businesses that investors tend to turn to in times of trouble when the economy is shrinking.
These recession-proof stocks could come from recession-proof industries, or they might just offer a recession-proof product themselves.
Often, recession stocks relate to companies and sectors that have held strong during past recessionary periods - not only surviving, sometimes even thriving.
But, it’s important to keep in mind that past performance doesn’t dictate future results. Just because particular stocks or shares prospered previously as recession-proof businesses doesn’t not guarantee they’ll have repeat success. This recession may be a completely different situation.
So history doesn’t repeat exactly, but it does tend to rhyme. So, there are still lessons we can take from the past to make better decisions when trading stocks and looking for potential candidates in recession-proof industries to act defensively in our portfolio.
Recessions aren’t always bad news for the stock market. Even when we’re hit with the next instalment of ‘honey, I shrunk the economy’, there will still be plenty of stocks continuing to grow in value.
There are certain items and needs that people will prioritise and continue to spend money on, regardless of their confidence in the state of the economy. The essentials, if you will.
The companies creating these products or offering these services are often considered to be stocks that will outperform during a recession. They may not outperform their own growth rates in years past, but they’ll likely outperform some of the companies offering the more frivolous,‘nice to have’ products.
The following list of stocks aren’t necessarily the best stocks to invest in during a recession, because there’s no universal one-size-fits-all answer.
But, you can look at popular stocks from typically recession-proof industries to get inspiration and ideas about how to invest during a downturn, in an attempt to shore up your portfolio and best prepare yourself for whatever lies ahead.
Here are some of the most-bought stocks on Freetrade last year that tend to fall into the recession-proof bucket for a lot of investors:
Source: Freetrade Data 2022.
Again, none of this is to say adding these to a portfolio is a sure fire way to protect against recession-led falls. Laying them out like this just shows how investors think about the economy when consumers are strapped for cash and quite nervous over their spending habits.
Let’s take a deeper dive into these so-called popular recession-proof stocks by first breaking them down into their respective industries so you can learn more about the underlying businesses.
Not to be confused with PG Tips teabags, Procter & Gamble (PG) has long been a favoured stock pick for investors hoping to add a recession buffer to portfolios.
Reason being, the bulk of its business is centred around household brands such as Gillette, Oral-B, Ariel, and Head & Shoulders, to name but a few.
Even during a recession, most will continue using shampoo, spraying deodorant, and washing clothes. So many of its products continue to sell at their usual rate.
Another highlight of this blue-chip stock is that it has been around for yonks. It survived most modern recessions on record. So there’s plenty of data for investors to dive into.
But, the stock could suffer if consumers start switching to cheaper brands, even if it's just a temporary swap to cope with rising costs elsewhere at home.
This is another recession stock with plenty of well-known brands under its wings, making Unilever (ULVR) one of the biggest businesses based in the UK.
The company has already been testing the waters with price hikes across some of its brands. So far, consumers have been able to swallow higher prices. But, they may not have the stomach for these added costs if we do end up in a full-blown recession.
Sales revenue has been decent in 2022, growing 8.1% in the first six months compared to 2021. And, a weak pound isn’t so much of an issue as Unilever operates in 190 countries.
Though, there’s also the danger that consumers stray away from the big brands and start opting for some own-brand mayo or ice cream instead.
Forget the full GlaxoSmithKline mouthful, the firm’s now simply GSK (GSK).
This British healthcare firm is one of the most traded shares on Freetrade and could nowadays be classed as part pharmaceutical, part biotech stock.
It’s sometimes considered a recession-proof stock due to its involvement in the development and manufacturing of essential medicines and vaccines sold across the globe.
However, there are niggles behind the scenes. GSK recently spun off its consumer healthcare division, Haleon, which led to a dividend reduction. It’s also been dealing with lawsuits around a now-shelved drug called Zantac. So it’s a stock that is currently facing some obstacles, regardless of whether we’re in or out of a recession.
Once famed for its recently discontinued talcum powder, Johnson & Johnson (JNJ) does so much more.
It’s a stock with a long, storied history and plenty of empirical proof that it can survive a recession. This is partly because of its diverse business model, sitting somewhere between Procter & Gamble and GSK. Its involvement in both consumer products and pharmaceuticals could leave it well positioned to weather a recession.
This diversity has enabled JNJ to consistently raise its dividend over the last 60 years, throughout multiple recessions. But, that’s not to say it will continue to do so.
The firm also recently lowered its projections for the rest of 2022 due to the impact of foreign exchange rates, proving it's not immune to other economic pressures.
As one of the largest publicly listed utility companies, pumping out gas and electricity to the masses, this puts National Grid (NG) in a sturdy spot to withstand a recession.
Assuming we keep our lights on during the next recession, NG is a firm that should suffer less than most. Though, it recently announced what will be a costly upgrade to its network as it attempts to become greener. While it’s a much-needed transformation, it won’t come cheap. Plus, NG is already laden with £44.7bn of debt as of March 2022.
If the recessionary floodgates open, this utility stock will aim to hold strong.
Instead of energy, United Utilities (UU) is primarily a water business. It manages water supply and wastewater networks in the UK.
Given UU makes money from the elixir of life, there’s little chance that all of the taps will be turned off during a recession. It has also historically offered a decent dividend yield for investors looking for income or looking at some of the best dividend stocks to buy. While UU isn’t necessarily one of the ‘best’, it has paid a dividend since 1990, which at the very least makes it a long-time payer.
It’s a recession stock that’s unlikely to see surging growth, but it should be able to move in line with inflation and generate a steady cash flow throughout a downturn.
Still, like most other stocks, UU will have to deal with rising costs and rising wages. As water is a regulated industry, it’s also difficult for UU to raise prices to maintain or increase profit margins to cope with heightened expenses. Meaning it doesn’t have the same pricing power flexibility as some other generally recession-proof businesses.
Although it’s not the cheapest of supermarkets, J Sainsbury (SBRY) isn’t the most expensive either. According to Which, Sainsbury and Tesco pretty much sit right in the middle when it comes to their average basket price in the UK.
If consumers move away from higher-end grocery stores during a recession, this could lead to an uptick in business for SBRY. Since food is a necessity, supermarkets in general tend to be one of the main recession-proof industries.
It’s the second-largest UK grocery store, maintaining roughly 14.8% of the market share according to Kantar. However, the share price has seen a fair decline over the last five years and is now below its IPO levels.
Tesco puts Sainsbury to shame when it comes to the British grocery market share, though. It controls roughly 26.9% of the market, making it the largest supermarket by a stretch.
Part of the Tesco (TSCO) appeal is its ability to cater for a diverse selection of customers across a range of incomes, which could render it one of the recession stocks more likely to succeed.
However, it is facing rising supermarket competition from Lidl and Aldi who hope to snatch some of its market share. And, if customers decided to cut down on grocery bills in a recession, TSCO may face even fiercer competition from the German duo.
Walmart (WMT) has a few recession-proof characteristics to it.
Firstly, it’s a discount retailer and grocery store. That makes it more resistant to a downturn in spending. Secondly, it’s a household name with a huge network of shops stretching across the US. So it likely has the scale needed to change prices and cope with rising costs if need be. On top of all that, it also owns UK discount supermarket Asda. Meaning, it’s got a decent foothold on both sides of the pond.
As a business, it sells plenty of recession-resistant items such as groceries, pet food, and toiletries. It’s also working on improving its e-commerce offering, which should increase the extent of its availability throughout its main operating countries.
Of course, no business comes without some chinks in its armour and it hit the headlines not long ago after lowering its earnings outlook. Yet the reality was earnings didn’t decline as much as predicted, and its share price has generated a fair bit of momentum since the pandemic’s first lockdown.
Costco (COST) has been coping well with retail inflation. And, profits made from its annual membership fee could give it an added layer of recession resistance too, as it’s a reliable income stream even if customers are spending less in stores.
Even with its attractive discount bulk buys and the predictability of a membership fee-based model, Costco needs to be particularly efficient with inventory during a recession to make sure it’s not overstocking and underselling, to best manage its sales pipeline.
If the rest of your finances are looking healthy and you’ve got yourself a decent emergency fund, a long-term investing outlook could be one of the best ways to put your money to work. That’s why investing early, if and when you can, is the best way of generating sustainable returns.
For those of you who want to attempt to create a recession-proof portfolio with stocks, here are the three steps to start.
But before you begin, it’s worth comparing different brokerage accounts to decide which one best suits your investing habits and platform needs.
Then, you can use these steps as a possible blueprint:
Unfortunately, there is never any kind of guarantee when it comes to investing. That doesn’t mean you can’t make good, wise long-term investing decisions. It just means you can never have 100% certainty that your investment will grow.
Recession stocks are no different, and it’s impossible to say if these will turn out to be the best options.
But, there are good options out there. And one of the ways you can start hunting for recession-proof stocks and businesses is by looking at similar companies to those mentioned above. Then, dig into each of the industries, and you might find your own favourite picks to consider.
See the most popular investments with a breakdown of the most traded stocks and most popular ETFs on Freetrade. Follow the IPO calendar and keep an eye on exciting new investment opportunities.
Important Information
This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.
When you invest, your capital is at risk. The value of your portfolio, and any income you receive, can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.
Eligibility to invest into an ISA and the value of tax savings depends on personal circumstances and all tax rules may change.
Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).
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