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The Best Stocks to Pick in Times of Recession
Personal Finance

The Best Stocks to Pick in Times of Recession

Story Highlights
  • All industries will feel the effects of decreased consumer spending, conservative business practices, and an overall depressed economic outlook.
  • There are specific industries that will be more sheltered than others from the harshest effects when the economy slows down.

Finding Value When Times Get Tough

Downturns in the economy have wide-ranging impacts, which by definition have repercussions for numerous sectors and industries. Identifying good stock options in difficult macroenvironments is both an art and a science, which is often reliant on finding both recession-proof industries and companies with good fundamentals that are well placed to survive a downturn.

Beyond stocks, there are a number of different types of investments that can help you ride out a recession. Diversifying your portfolio is generally a good strategy (both in good times and bad), as it will shield you from having your wealth wiped out from losses in a single sector or investment.

What Are the Best Stocks to Pick During a Recession?

The idea that there are recession-proof industries is a bit of a misnomer. Depending on the size and scope of the downturn, all industries will feel the effects of decreased consumer spending, conservative business practices, and an overall depressed economic outlook.

That being said, there are specific industries that will be more sheltered than others from the harshest effects when the economy slows down.

  • Food and nutrition: When times get bad, consumers will look to cut down on items that they do not consider necessities. Food and other nutritional needs, on the other hand, are items that people will always need. Grocery stores–especially discount ones–and food manufacturers are considered safe investments that are sheltered from economic downturns. On the flip side, those companies that are dependent on discretionary spending, such as restaurant chains, may not weather a slowing economy quite as well.
  • Pharmaceuticals: Items related to health and wellness can also be considered relatively safe prospects when the economy hits a rough patch. Demand for products related to dental hygiene, medicines, and other health care-related expenditures, for example, probably will not be dramatically impacted by a downturn. Therefore, companies that sell these types of items make sense to hold when the economy slows down.
  • Discount retailers: While people may decide to forgo purchasing new clothes if possible, kids continue to grow, shoes get worn out, and pants rip. Those retailers who offer discount clothes will likely see their business increase, as individuals looking to cut down on spending will try to find bargains and save money where they can. The Lipstick Factor is a known economic phenomenon as well, whereby individuals will skip big-ticket expenditures in favor of smaller luxury items (i.e. they will not splurge on a summer cruise, but will purchase a new shade of lipstick). On that note, companies offering cheaper cosmetic items can also serve as good options.

For those who are looking to safeguard their wealth during a downturn, companies that provide goods and services that people will need regardless of price or overall economic environment are good investments to consider.

Thinking About the Day After

Investors looking to secure their long-term well-being would do well not just to think about how to safeguard their monies during a downturn, but also how to capitalize on gains when the market picks up. For example, the cyclical stocks that may have been the hardest hit (luxury items, for instance) will likely experience growth when the economy starts to improve and consumer spending increases.

Additionally, the technology sector–especially growth stocks–can experience rapid growth when the economy picks up steam. Also consider which stocks might be most hard hit by the type of recession the economy is experiencing, as the contours of the particular downturn matter as well. For instance, in the ten years following the great recession of 2008-2009, when Wall Street losses sent the economy into a tailspin, the financial sector rebounded particularly well.

The secret of course, like everything, is knowing when to buy. Understanding when the economy is starting to turn around is an art, in and of itself. By the time there is consensus that a recovery is in full swing, stocks are likely to have already started climbing and it might be too late to capitalize on the greatest gains. Therefore, even when you buy the “right” stocks during a recession, you run the risk of buying them at the wrong time. This is difficult to avoid, but careful stock research can help you.

Conclusion: Staying the Course

Picking stocks is never without peril, however TipRanks offer numerous tools to help you minimize your risk. Being deliberative is usually the best approach, as is avoiding knee-jerk, reactionary acquisitions. The percentage of your portfolio you are devoting to equities depends on your own personal risk preferences. Those who are more squeamish when it comes to investing should consider riding out downturns in more secure investments such as savings accounts, Certificates of Deposit, or bonds.

Over time, the stock market has generated enormous wealth for those keeping their monies invested for the long haul. Markets tend to make healthy returns over time, even though individual years might be gloomy. Moreover, do not underestimate the long-term benefits of compound interest, whereby your gains will start to make money as well.

This does not mean that there are not benefits to be gained from thinking about short-term opportunities when slowdowns occur. Understanding which stocks are more likely to do well when times get tough can help you do well, even when the rest of the economy is not.

Learn money management, and use data-driven stock insights with TipRanks.


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