Stocks that do well in a recession?

With global economic pressures mounting, market commentators believe a recession in several major economies is imminent. This blog looks at a collection of stocks that all have ‘buy’ consensuses from market commentators, including Zacks and CNN.  

Within the world of finance, the first half of 2022 has proven to be a memorable year, unfortunately, for all the wrong reasons. Raging American inflation, an energy crisis throughout Europe, and China struggling to emerge from strict COVID restrictions is putting significant pressure on GDP growth worldwide.

What is a recession?

The definition of a recession is two-quarters of negative GDP growth. GDP stands for gross domestic product, which is the economic term for the amount of value-added production. In short, a recession is two consecutive quarters where economic activity declines.

Recessions often create bear market conditions in major markets, including the S&P 500 and NASDAQ. However, not all stocks react negatively, as this blog discusses.

Why a recession is bad news

When a nation enters a recession, there are generally very few winners. Recessions can trigger high levels of unemployment, business closures, bankruptcies, and a significant reduction in consumer confidence, especially for luxury or non-essential goods. As a nation’s economy starts to slow down, a domino effect begins, which inflicts economic damage in several areas.

In general, recessions are considered bad news for stock markets, as lower economic activity results in lower business levels for companies. Companies with lower earnings will discourage investors and, in turn, may see their share prices fall as a result.

As with any event, there are winners and losers, so this blog will explore which companies have the potential to perform better in a recessionary environment.

A recession means a drop in consumer confidence

When recessions begin, consumer confidence drops. This happens for a range of reasons. Firstly (especially within the current environment), inflation is high, making everyday items more expensive. The outcome? People feel the squeeze on their wallets.

Within the United States, when consumer confidence drops and poverty increases, companies which offer value to consumers do much better. In the US, this trend is likely to drive consumers towards companies including Walmart (NYSE: WMT) and Costco (NASDAQ: COST).

Both Walmart and Costco fared well during the 2008 global financial crisis as consumers were forced to cut back on expenditure.

Products with inelastic demand

Demand for certain products remains broadly unchanged even if the prices change. This is known as inelastic demand. Products or services that fall into this category are those that, irrespective of consumer confidence, are required for daily life. Several examples include utilities, staple foods, toiletries, and prescription drugs. Below we look at a company from each category likely to perform well in a recession.

Utilities

The utility market is somewhat skewed at the moment due to the war in Ukraine creating supply pressures due to sanctions on Russia. Oil companies and other energy suppliers have seen widespread share price increases since March, so the boat may have been missed for investors at this stage.

With the entire economy being linked in some way to the price of oil, price inflation is broadly unavoidable. However, energy companies that have a degree of diversification offer investors a way into a non-price sensitive market, which isn’t overly linked to the price of oil.

One such company is American Electric Power (NASDAQ: AEP). The company has been one of the most consistent stock market performers since the 1980s. AEP produces its electricity from a diversified energy mix which includes wind, solar, nuclear, coal, hydrocarbons and hydroelectric, meaning that its margins will be less affected by the increasing oil price.

The EIA anticipates global energy demand to grow 47% in the next 30 years, driven by population and economic growth. AEP looks like an attractive stock within the current inflationary market and beyond.

Toiletries and consumer goods

There are certain activities which are not greatly impacted by a recessionary environment, including the purchasing of basic consumer goods.

Unilever (LON: ULVR) is a company that has not performed on the stock market in line with the majority of companies since March 2020. Unlike many shiny, exciting tech companies that the new generation of investors flocked toward, Unilever hasn’t proven a flavour of choice. But it is certainly not a company that should be overlooked, especially in a recessionary environment. Unilever’s fairly attractive PE ratio of 17.92 makes it a good pick for value investors. The company achieved a revenue of 52.44 billion EUR in 2021.

Unilever boasts one of the most extensive consumer goods ranges with brands including Ben & Jerry’s, Comfort, Hellmann’s, Dove, Lifebuoy, Rexona, Axe, Vaseline, Wall’s and Marmite. Given how the stock is priced and its range of vastly popular consumer goods, Unilever looks like a recession-proof stock pick.

Prescription drugs

One of the best examples of a sector that will not be affected by inflation is big pharma. People quite literally need their medication to stay alive, so prescription drugs are often considered the safest item on a person’s shopping list.

Since the COVID-19 pandemic, certain vaccine companies have experienced volatile performance on the stock market. One company that has managed to produce steady revenue and stock market performance since the 1980s is the US pharma giant Johnson & Johnson (NYSE: JNJ). According to CNN’s forecast, J&J’s stock is projected to increase by 11.16% over the next 12 months.

This blog is for information purposes only and does not constitute financial advice. The securities discussed within this blog may only be suited to specific portfolios. Investment decisions should not be taken on the back of reading this blog. Investing directly into stocks can be a risky strategy; investors looking for higher levels of security may wish to invest in Mutual Funds due to the greater levels of diversification.

Please speak to your financial advisor for more information or click here to arrange a meeting with a financial advisor.

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© 2010 – 2022 deVere Group. All rights reserved.

© 2010 – 2022 deVere Group. All rights reserved.

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