According to the National Bureau of Economic Research (NBER), there have been five recessions since 1980. The S&P 500 declined during these recessions by an average of 4.4%. Even worse, stocks tend to experience the shock of recessions three to six months before a recession even starts.
That’s why it’s best to always be prepared.
The good news is, not all stocks suffer equally during a recession. In fact, some stocks are known as “recession-proof stocks” due to their resilience to recessions.
Here, learn about the basics of recession-proof stocks, and find examples of best recession stocks to get you started.
What Is a Recession-Proof Stock?
First, the basics. As mentioned, not all stocks suffer equally during a recession. Recession-proof investments are the ones least likely to be affected by an economic recession.
The NBER defines a recession as a “period of falling economic activity spread across the economy” that lasts longer than a few months.
In simplest terms, a recession occurs when the economy declines because people are buying fewer goods and services. Economists typically declare a recession after at least two consecutive quarters (or six months) of shrinking GDP.
The most recent recession occurred from 2008 to 2009. The Great Recession, as it’s known, led to a 3.25% contraction in GDP. This had huge effects across the American and global economies.
Prior to the Great Recession, the last two recessions occurred in 2001 (after the dot-com bubble) and in 1990 and 1991 following a shock in oil prices.
Recession-proof stocks tend to fall into one of two categories:
- Companies that provide a good or service that is critical to everyday human life, such as basic hygiene, food, or utilities. Consumer staples and S&P 500 stocks are likely to be recession-proof stocks. That’s because during a recession, consumption tends to hold up better than other sectors of the economy — even with less to spend, everyone still needs the basics of life.
- Companies that provide nonessential items at significantly reduced prices. People still buy things that aren’t necessities during a recession, but they’re more likely to be looking for deals. This could include discount retailers, as well as companies that provide things people don’t need but still really love, such as alcohol or tobacco products.
It has been more than a decade since the last recession, which means now is a great time to invest in stocks that do well in a recession so you’re prepared. That being said, here are seven strong stocks to buy in a recession.
Walmart (NYSE: WMT) is practically the perfect recession-proof stock. Walmart’s shares actually went up by an average of 42.4% during the past five recessions. Even during the particularly vicious Great Recession, Walmart’s shares rose by 1.1%.
With more than 11,000 brick-and-mortar locations around the world as well as rapidly growing e-commerce operations, Walmart is a behemoth. That means it can negotiate low prices from suppliers and pass on those savings to Walmart customers.
Walmart also has strong brand name recognition and a long history. Finally, Walmart pays out a steady, sustainable dividend yield, making it a stable bet during a recession.
A 2009 National Institute of Health (NIH) study found that smokers increase their cigarette intake during a recession.
Altria (NYSE: MO) is the tobacco industry’s largest domestic player, parent to the ubiquitous Marlboro brand, in addition to a number of other discount brands.
It is difficult to say for sure how Altria stock fared during the Great Recession, since the company spun out its international operations at that time, but its stock did grow by 28% between December 2007 and December 2010. Thus, Altria far outpaced the market average.
Overall, fewer people in the United States are smokers. However, Altria has been able to increase its prices over time without losing customers even as more people quit, leading to consistent growth.
Because people are unlikely to give up cigarettes during the next recession, Altria is a good bet as a recession-proof stock.
3. Dollar Tree
Dollar Tree (NYSE: DLTR) fits squarely into the second category of discount retailers, making it a smart recession-proof stock. For example, Dollar Tree gained 61% in 2008, which is an incredible pace of growth when compared to the rest of the market.
During the Great Recession, Dollar Tree was a much smaller company than it is today. When its fiscal year ended in January 2009, Dollar Tree had an annual revenue of $4.6 billion. In contrast, it had a $23.3 billion trailing 12-month revenue as of August 2019.
The organization also acquired Family Dollar stores in July 2015, making it an even bigger company. Dollar Tree is currently renovating the newly acquired stores, and Dollar Tree CEO Gary Philbin reported that Family Dollar has grown since then.
McDonald’s (NYSE: MCD) Big Macs and fries are other items people are less likely to give up during a recession. That’s because, simply put, they’re both cheap and delicious. Plus, McDonald’s is a widely recognized brand.
McDonald’s also has the track record to prove its resilience. In 2008, McDonald’s global same-store sales grew by 4%. In 2009, they grew by 3.8%, including a 2.6% improvement in the United States.
McDonald’s is considered to be one of just 57 Dividend Aristocrat companies, having put up more than 25 years of dividend increases. In fact, the company has raised its dividends over 43 consecutive years.
In 2019, the global behemoth continued to grow. The company is rolling out Experience the Future stores by digitizing and modernizing its locations. These are expected to generate higher profits and more visits. Indeed, U.S. same-store sales grew by 5.7% year-over-year during the 2019 quarter that ended June 30. Plus, the company continues to serve more than one million customers each day around the world.
All told, McDonald’s is set up to continue this strong pattern of growth during the next recession, making it a great recession-proof stock.
5. Johnson & Johnson
Chances are, you use Johnson & Johnson (NYSE: JNJ) products every day. The company owns brands such as Tylenol, Listerine, Band-Aid, and Neutrogena, among others. It also has a pharmaceutical and a medical device division.
Johnson & Johnson’s three main segments complement each other. While the consumer division remains relatively stable, the pharmaceutical division is also strong. Plus, the medical devices division can provide a boost even if the other two segments falter in a recession.
Indeed, following the 2008 crash, Johnson & Johnson’s sales went up by 2%, and its earnings increased by 8%.
If you’ve ever started your day off with a bowl of Frosted Flakes, you know why Kellogg (NYSE: K) is among the best stocks to buy if a recession is coming. Kellogg’s breakfast division, including items like Eggo frozen waffles and Nutri-Grain bars as well as its cereals, is poised to do well during a recession since consumers are typically looking to spend less cash on food by eating at home and buying cheaper packaged food items.
Kellogg’s is looking extra interesting this time around because it is set to introduce its plant-based meat alternative, Incogmeato, in early 2020. The highly competitive arena of plant-based proteins is growing as more people adopt a vegetarian or ‘flexitarian’ diet. Kellogg’s MorningStar Farms division, which owns Incogmeato, also boasts frozen and fully prepared chicken tenders as well as the country’s top-selling veggie burger. This positions it well to compete in this market.
AutoZone (NYSE: AZO), an auto part retailer and distributor, is another discount retailer poised to fare well in a recession. During a recession, rather than hiring a mechanic, more consumers look to save by performing their own auto repairs. Auto parts are considered nondiscretionary spending, which is another reason they tend to hold up during recessions.
That explains why AutoZone was one of the S&P 500’s best-performing stocks during the Great Recession, gaining more than 16% in a single year.
AutoZone has also performed well since then, with an annualized return of 21.3% between March 2009 and September 2019, ahead of market share during that period. In spite of the recent U.S.-China trade war, AutoZone has continued to perform well, even when some of the best-performing stocks have been hit by the cost of tariffs.
Now is the perfect time to get your stock portfolio balanced and ready for a recession. You don’t want to be caught unprepared when one strikes. To learn more about how to build your portfolio, check out our free trading handbook, or meet our team of experts today.