- Most economists still believe the U.S. economy will enter a recession in 2023.
- Typically, the stock market as a whole falls during a recession, but some industries are less impacted than others.
- The most stable industries are ones that people need, regardless of the state of the economy.
Many experts believe we are closing in on a recession in 2023, as the impact of several Federal Reserve rate hikes continue to filter through the economy (among other reasons). A typical result of a recession is a down stock market, which many investors in 2022 know well. But not all investors realize some industries are more immune to a recession than others. Here are some recession-proof industries to consider to help you weather the storm.
Why a recession is expected
Economists expect a recession to hit the U.S. due to the Federal Reserve’s efforts to combat inflation. Since early 2022, the Federal Reserve has been raising the federal funds rate and has signaled it will continue to do so until prices cool off. The Fed acknowledges that there will be pain for consumers and industries alike, but it also can’t allow an inflationary environment to continue.
Raising the federal funds rate draws money out of the economy and makes it harder for industries and consumers to produce and buy. The leading economic indicators of a recession have already occurred, to a degree, and it’s still likely the economy will experience a mild recession in 2023. However, the increase in the federal funds rate shows signs of working as of late November 2022 when both the consumer price index and producer price index reports came in better than expected.
The job market has been holding strong with only minor losses of employment; however, more corporations are beginning to lay off employees. Many of these employees have valuable skills and are being quickly hired at other companies.
All of this adds up to the same conclusion: a recession is likely in 2023, but it is expected to be mild and short-lived.
Regardless of the overall economic climate, investors need to consider recession-proofing their portfolios with stocks that perform well in the worst economic times.
Typical impact a recession has on the stock market
Fear of a recession can effectively spook the under experienced investor and cause them to sell their stocks while seeking to preserve their profits. Consumers usually roll back their spending, which affects the profitability of most industries. Lower profits result in lower stock value, which can take years to recoup. Investors don’t want to wait, so they sell off their holdings for a better return elsewhere. Meanwhile, stocks further lose their value because a sell-off is seen as a sign of weakening confidence, causing other investors to follow suit.
The overall effect on the stock market is a bear market or a sustained period of falling security prices. The critical thing to remember is that a bear market, and even recessions, are a normal part of the economic cycle. The economy grows for some time and then retracts, only to grow further down the line. The main variable is the length and severity of the pullback.
The good news is that not all industries are susceptible to the effects of a recession. Consumers still need to maintain their basic needs and protect themselves from calamity. That means some industries still offer investors the opportunity to earn a return on their initial investment and receive a dividend for each share of stock they own. Here are some recession-proof industries investors should look into. It is vital to remember that not all companies within an industry are worth investing in. In other words, investors should not invest in any company within a recession-proof industry. You want to invest in the best companies in these industries.
Insurance is something that people need to protect their vehicles, their homes, and other valuable assets. This means insurance companies are more likely to maintain their base of policyholders and add more of them, even through a recessionary period. Consumers must hold an insurance policy as part of a financial agreement and will voluntarily keep a policy in other cases. This means that insurance companies will always be able to turn a profit and deliver dividends, making insurance stocks a solid security to hold in the portfolio.
Health care is necessary for everyone, as people need medical help for many reasons throughout their lives. Most of the time, consumers use health insurance to pay for the cost of their medical care, then go to drug stores and other outlets that fill prescriptions and sell medical supplies. Consumers tend to obtain health insurance through a government exchange or private insurance agents.
The government exchange helps subsidize the cost of consumer health insurance and guarantees a steady base of policyholders to insurance companies. This also brings more people into the healthcare system, making it more profitable overall. Publicly traded healthcare organizations and insurance companies deliver steady returns in the form of dividends and stock value, no matter what’s going on in the greater economy.
Utilities are vital to daily life, and they’re something people can’t live without in modern times. All utilities are government-sanctioned monopolies, but they’re also publicly traded on the stock market. They’re allowed to earn profits, even with government regulation, and they typically deliver good returns on investment.
One thing to keep in mind when investing in utilities is the fact they appreciate slowly but surely. They also deliver steady dividends, making them a good investment in good times and bad. Utility stocks are perfect for the investor who wants an industry that can be held long-term while steadily delivering a nice return over the years.
Food is necessary, and grocery stores provide the sustenance people need to live. Moreover, consumers often turn away from spending money at restaurants and cook more at home during a recession. The result is more people go to the store and spend more than they would in a typical economic environment. Grocery store operations become more profitable and improve the value of their stock. The average receipt at a grocery store may shrink somewhat when economic conditions stabilize, but they’re another type of industry that provides steady stock price growth over time.
Industries that supply grocery stores with products are also recession-proof stocks, even ones that sell specialty products. Consumers generally buy less in the way of expensive products, but they’ll still stretch their budget for a treat on occasion. Major food and drink manufacturers make good additions to the portfolio and deliver steady growth over time.
Recessions are a normal part of the business cycle. But this doesn’t mean investors need to accept that the stock market will drop in value and their investments will lose money. Instead, investors need to be proactive and seek out stocks in industries that can handle a recession with minimal impact on their bottom line.
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