What Sector Is Best During a Recession?

Still, not every industry recovered during the pandemic, and measures that were implemented to “save” the economy had unintended consequences.

• Direct cash payments to families and other loans and grants filled up bank accounts at a time when there weren’t many places to spend money.
• Interest rates dropped to almost nothing, and credit was easy to come by.
• Gas prices spiraled out of control, helped along by the Russian invasion of Ukraine, and inflation hit 40-year highs.

By the beginning of 2022, talk of recession started again. This time, most economists and market experts agreed that another economic downturn was inevitable. The only area of debate was when the recession would come. Early 2023? Later in the year? Not until 2024?

So far, recession has not taken hold of the US economy, but the consensus remains that a recession is almost certain. Projections for timing range from the second half of 2023 to the fourth quarter of 2024 – but it’s not a matter of whether there will be a recession. It’s a matter of when.

That leaves investors with lots of questions. What is the best way to recession-proof a portfolio? Which sector is best during a recession? What sectors should be avoided during a recession? And the bottom line – how do you make the most money in a recession?

Which Sector Is Safest During a Recession?

Unemployment is a frequent companion to recession, so consumers tend to tighten their budgets during uncertain economic times when the threat of layoffs looms. That means large purchases, non-essentials, and luxuries are out of the question. However, some expenses can’t be eliminated, though it might be possible to trim them.

For example, a certain amount of gasoline is a must-have, though drivers might reduce their total mileage to conserve fuel. People always have to eat, though they often skip restaurant meals and substitute prepared foods from the grocery store during a recession.

It’s also common to see consumers switching from name-brand items to store-brand alternatives when budgets are tight. The same goes for other consumer staples like personal hygiene products and cleaning supplies.

Utilities such as heating, electricity, internet, and phone service nearly always get a place in the budget, even when household income goes down.

Certain health services can’t be put off, recession or not, and – as unpleasant as it is to think about – the cost of funeral, cremation, and burial services is unavoidable, regardless of economic conductions. As a result, these sectors tend to be safest during a recession.

What Are the Best Stock Sectors In a Recession?

The best sector in a recession is utilities because consumers always need electricity and power. Healthcare and consumer staples are two other recession-resistant sectors.

The best recession-proof stocks belong to businesses that continue to attract customers, regardless of financial circumstances.

That is generally true of many companies that fall into the consumer staples, food and drink, healthcare, oil and gas production and refining, and utilities sectors. However, some companies within those sectors are more successful during economic downturns than others.

Discount stores, big box stores, dollar stores, and other retailers that compete on price are popular when money is tight, because they offer essential items for less than their competitors. Some of the best dollar store stocks include Dollar General, Dollar Tree, and Five Below.

On the big box side, there is Big Lots, and investors who want big box mixed with grocery will find that Costco, Walmart, and Target see strong sales in consumer staples, food, and drink when consumers are focused on saving their money.

Healthcare stocks are a bit trickier because some healthcare products and services are more essential than others. Some healthcare stocks that are expected to do well in a 2023 or 2024 recession include major industry players like Amgen, Bristol Myers Squibb, Humana, Merck, and UnitedHealth Group.

If utilities are more appealing, American Water Works, NextEra Energy, and Waste Management are notable for their ability to bring in steady revenue, which is the biggest concern during a recession.

The only recession-proof sector that might not pay off in a 2023 or 2024 recession is oil and gas production and refining. The best oil and gas stocks saw tremendous gains when oil prices went up after the Russian invasion of Ukraine, and it isn’t clear whether and how they will adjust to an economic downturn.

What Sectors Should Be Avoided During a Recession?

Designing a recession-resistant portfolio takes more than buying recession-proof stocks in industries that have historically done well in volatile economic times. There is also the matter of exiting stocks in sectors that should be avoided during a recession.

Large purchases, non-essentials, and luxuries come last when consumers are conscious of budget restrictions. Which sectors fall into those categories?

Though technology has become deeply integrated into all aspects of business and leisure, the tech sector isn’t necessarily a smart choice for investors during a recession.

Industry leaders like Apple, Microsoft, Amazon, and Alphabet might not suffer much, but tech companies that aren’t yet profitable present significant risk.

These companies rely on investors to stay afloat. They need investor capital for everything from basic operating expenses to critical research and development. That capital will be harder to come by during a recession, which makes these companies particularly high-risk.

Real estate, homebuilding, and other housing-related companies usually don’t fare well during recessions, and this one may be particularly difficult for the entire housing and construction sector. The sharp rise in interest rates pushed mortgage prices up so quickly that the market went into shock.

Prospective home buyers are rethinking their plans, and sellers are watching their property values spiral down. This trend is likely to get worse before it gets better, so investors with short investment horizons should stay away from anything to do with real estate or construction.

Other sectors to stay away from before and during a recession include tourism and hospitality, which have not quite recovered from pandemic-era travel bans. Most companies cut travel budgets first when business is slow, and even the most passionate travel and tourism enthusiasts think twice before taking an expensive vacation during a recession.

What Is the Best Asset During a Recession?

There is an inverse correlation between the stock market and gold prices, and bonds also tend to go up when the market goes down. When investors are worried about the state of the economy, they flee higher-risk stocks in favor of safer alternatives.

Gold, bonds, and other assets traditionally considered safe are fine to include in a portfolio, but there is no need to avoid stocks altogether. The stock market has always recovered from recessions, and there is no reason to believe this time will be any different. A better choice is to buy high-quality stocks when the price goes down, then hold them long-term.

A more important issue is the worst assets to hold during a recession. Which assets might not recover from an economic downturn?

The short answer is any speculative, volatile, or untested asset may not survive a recession, and even those who are comfortable with high-risk, high-potential-reward gambles should stay away.

One of the best examples of assets to avoid during a recession is cryptocurrency, which is already going through a difficult time. The conditions associated with a recession are likely to make cryptocurrency prices more volatile than they already are, which could be disastrous for anyone holding a large percentage of their portfolio in this type of asset.

How Do You Make The Most Money In a Recession?

The stock market is a proven method of building long-term wealth, but it is notorious for destroying wealth when investors attempt get-rich-quick strategies.

The best way to make money during a recession is to use the same investment strategy that the world’s best investors rely on throughout economic cycles: thoroughly research companies before buying stock, and stick with businesses that are well-managed, financially sound, and leaders in their respective markets.

Buy stock in companies that meet those criteria when the stock is undervalued, then hold onto it forever – or as close to forever as possible.

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