When a recession hits, many companies face the prospect of declining revenues and profits.But some businesses perform well even when economic times are tough. These recession-proofbusinesses typically provide essential services, such as healthcare, or sell vital goods,like food. People need to buy these goods and services in good times and in bad.Recession-proof industries may not grow fast when the economy is booming, but they tend tooutperform others when recessions occur.
What is Recession-Proof?
A recession is a significantand broad decline in economic activity, usually lasting for at least two consecutivequarters. During a recession, customers tighten their purse strings and buy fewernonessential products and services. As a result, many industries experience hard timesduring a recession. These are called cyclical industries because their fortunes ebb and flowwith the economic cycle.
In contrast, other industries — especially those that sell essential products andservices — are consideredrecession-proof because they are able to continue performing relatively well evenduring periods of economic contraction. These include energy suppliers, such as electric andgas utilities; providers of everyday consumer products, like food; and healthcare companies.
Key Takeaways
- Recession-proof businesses typically provide essential goods and services that customerscontinue to buy even when the economy contracts.
- Many recession-proof businesses are in defensive sectors, such as utilities, healthcareand basic consumer products like food.
- Investments in these industries and in assets such as bonds and gold often performbetter during recessions than the broader stock market.
Recession-Proof Explained
Many recession-proof companies provide products or services that consumers need to buyregardless of whether the economy is growing or shrinking. During a recession, consumerstypically reduce spending on nonessential items, like entertainment, travel and luxuryclothing.
There are a number of steps any company can to take to recession-proof their business, buteveryone needs to buy food to eat and electricity to keep the lights on — even if theeconomy slows and paychecks shrink. As a result, demand for these goods and services remainsrelatively stable. That's why utilities, healthcare and grocery stores are among theindustries considered recession-proof. For investors, shares in these companies are alsoconsidered recession-proof since they are among the few stocks that have historicallyoutperformed the broader market during a recession.
Negative Beta
Beta is a way to measure a stock's price volatility compared to the overall stockmarket. If a company's stock has a beta of one, its price volatility matches theoverall market. Stocks with low beta are less volatile than the market. Meanwhile,investments with negative beta are inversely correlated to the broader stock market —they rise when the market falls and vice versa.
Recession-proof stocks and investments are more likely to have low or even negative beta thanother stocks and investments. During a recession, the market typically falls as corporateearnings drop. But recession-proof companies are relatively unaffected, so their stockprices don't move in sync with the market. Some investments, such as gold, havenegative beta — they often rise in value when stocks fall. Conversely, when theeconomy is expanding and the stock market is rising, shares in companies with low ornegative beta are likely to underperform in the market.
Defensive Industries
Defensive industries are relatively immune to economic cycles. They are generally consideredrecession-proof because their revenues and profits remain fairly stable whether the economyis expanding or in recession.
Defensive industries typically provide products and services that are essential to consumers.Key defensive sectors are utilities, consumer staples, healthcare and telecommunications.Consumer staples are goods and services that people use every day. For example, mostconsumers need to buy food at grocery stores, but they don't need to eat at restaurants— so grocery stores are considered to be part of a defensive industry but restaurantsare not.
Recession-Proofing Your Portfolio
Businesses and investors seeking to protect their investments against the impact of arecession can do so in several ways. One step is portfolio diversification: adding stocks orother financial assets that traditionally perform well during a recession. These couldinclude shares in companies in defensive industries that are relatively unaffected byeconomic downturns, like utilities and health care. Mutual funds and exchange-traded funds(ETFs) that invest in those sectors are also available. Other potential investments includegovernment-issued bonds and gold, which traditionally perform better than the stock marketduring recessions. It may be advisable to hold enough cash to cover any immediate needs andpotential emergencies.
A recession-proofed portfolio has pros and cons. During a recession, it may outperform aportfolio that focuses on riskier high-growth stocks and other assets. However, it mayunderperform during economic expansions, and finding a balance between conservingcapital and investing is crucial.
Examples of Recession-Proof Assets
Some assets typically are resistant to the negative impacts of a recession. Here are somecommon examples:
- Bonds. Government-issued bonds are considered relatively safeinvestments because of their low risk of default. They pay a guaranteed interest rate,which can be particularly attractive when many other assets are falling in value.
- Gold. This element is traditionally seen as a "safe haven."Investors flock to gold when the economic environment is uncertain, so its price oftenrises.
- Cash. Maintaining a portion of a portfolio in cash has severaladvantages. It's low-risk and ensures that liquid funds are available if thebusiness needs them, such as when new investment opportunities arise. In addition, somerecessions are deflationary — prices actually fall — so the purchasing powerof cash increases over time.
- Stocks. Even when the stock market declines in a recession, shares insome companies can be attractive assets. They include companies in defensive sectors,such as utilities, healthcare and supermarkets. Companies that have large cash reservesand pay regular dividends can also provide good investment returns during a recession.
Recession-Proof Businesses
Some businesses typically weather recessions better thanothers. They're often companies that meet people's basic needs. Forexample, businesses providing groceries, home and vehicle repairs and discounted everydayconsumer products often do well during a recession.
- Utilities. Utilities generally remain stable during recessions becauseconsumers make paying their utility bills a priority. Water utilities, gas and oilcompanies, waste management firms and companies involved in building and maintainingutility infrastructure can all do well during recessions.
- Grocery stores. Everyone needs to buy food — and purchasing it atgrocery stores is less expensive than eating out, so supermarkets are consideredrecession-proof.
- Budget retailers. Stores focused on bargain-hunters can fare well.Discount and warehouse retailers, dollar stores and thrift stores can outperformretailers selling designer clothing and other expensive items when the economy is toughand consumers' budgets are pinched.
- Healthcare services. Many healthcare services are essential, socompanies throughout the healthcare industry tend to weather recessions well. Theyinclude hospitals, insurers and makers of pharmaceuticals and other medical products.
- Baby products and childcare. Babies need food, clothing, bedding andtoys. And for working parents, childcare is essential.
- Home and automotive repair. People need repair services when their homeplumbing springs a leak or their car breaks down.
- Alcohol and other vices. People may still be willing to pay forindulgences, like alcohol, candy and gambling during a recession.
Drive Business Strategy and Growth With NetSuite Financial Management
All recessions are temporary and are followed by extended periods of economic expansion. Soit's important not only to optimize business efficiency during a downturn but also toensure the company is positioned for growth when conditions improve. NetSuite's cloud-based financialmanagement solutions provide real-time visibility into financial performance, so youcan monitor key trends and quickly take action when necessary. You can also increaseoperating efficiency by automating and streamlining time-consuming manual accounting andfinance processes. Because NetSuite financial management is part of a broad suite ofbusiness applications, you can add modules as your business grows — includinginventory, customer relationship management (CRM) and ecommerce — and run the entirebusiness on a single solution.
Conclusion
Some businesses survive and even thrive during recessions. These recession-proof businessestypically provide essential goods and services in sectors such as healthcare, utilities andconsumer staples. Understanding how businesses withstand economic downturns can helpmanagers position for tough times and create defensive portfolios that outperform thebroader market.
#1 Cloud
Planning Software
Free ProductTour
Recession-Proof FAQs
What industries are recession-proof?
Industries that provide essential goods and services are typically recession-proof. Electricand gas utilities, grocery stores and doctors' offices are all examples of businessesthat tend to be recession-proof.
What industries are hit hardest by a recession?
Industries that grow and shrink in step with the economy are hit hardest by a recession. Theyinclude homebuilders and other companies involved in construction. Also hurt by recessionsare companies that sell discretionary goods and services that consumers can live without.Restaurants, retailers selling expensive clothing and the travel and tourism industries maysuffer.
What constitutes a recession?
A recession is a significant decline in economic activity that is spread across the economyand lasts for months or even years. It is reflected in metrics such as shrinking grossdomestic product (GDP), falling retail sales and rising unemployment. Most recessions lastfor at least two consecutive quarters.
What is meant by recession-proof?
A recession-proof company is one that continues to thrive when the economy declines. Manyrecession-proof companies offer essential goods and services such as healthcare, electricityand food. An investment or asset that's recession-proof will retain its value oroutperform the broader stock market during recessionary periods.
How do I make myself recession-proof?
One way to recession-proof your career and finances is to consider finding a job in anindustry that isn't negatively affected by recessions, such as healthcare or utilities.Also consider paying down debts with high interest rates, identifying ways to cut expensesand building an emergency fund just in case you are laid off from your current job.
What jobs are recession-proof?
Jobs in industries that provide essential goods and services tend to be recession-proof. Inthe health care industry, nurses, doctors, physical therapists and X-ray technicians are allexamples of recession-proof jobs. Auto repair mechanics can do well during recessionsbecause cars break down regardless of the state of the economy. Teachers, firefighters andlaw enforcement jobs are usually more stable than many private-sector jobs, but they can besubject to cuts if government revenues fall.
