Investing in a Recession – Equities That Tend to do Better

Keith Dunn | February 1, 2023

This article is reprinted with permission from Esq. Wealth Management, Inc.

Is 2023 heading into a recession?

If so, are there recession-proof investments? 

There are factors that suggest a pause in the bear market including the reopening of the Chinese economy, the cooling of inflation, and the apparent strength of the labor market.  Other factors suggest we are heading into a recession.  The Commerce Department reported last week that consumer spending fell in December for a second straight month.  Also last week, Spotify was added to the list of tech companies announcing layoffs (following similar announcements by Amazon, Meta, Alphabet, Salesforce, IBM, and Microsoft).  Economic uncertainty is spreading to sectors beyond the tech industry.  Hasbro Inc. announced last week that it would eliminate 15% of its global workforce (following similar announcements at Dow Inc., Goldman Sachs, Bed Bath & Beyond, BlackRock, and The Bank of New York Mellon Corporation).  Many economists and financial experts are forecasting a global recession this year. 

When a recession hits, stock prices generally plummet leading to buying opportunities for those that have cash or short-term investments.  But not all industries are equally impacted. Recession or not, people will still be buying basics, using energy, and seeking health care.  Purchasing shares of stock in companies in these industries may be a better bet if the economy ends up in a recession. 

For diversification, you can buy an exchange-traded fund (ETF) in each of these industries.  An ETF operates similar to a mutual fund insofar as it is a pooled investment security.  Like a mutual fund, an ETF is often structured to track a particular index, industry, commodity, or other assets.  An important difference between an ETF and a mutual fund is that ETFs can be purchased or sold on a stock exchange the same way that a regular stock is traded; the price fluctuates all day based on supply and demand.  Mutual funds are traded at the end of the trading day.  

Here’s a good starting point:

Consumer Staples: Consumer Staples Select Sector SPDR Fund (XLP) & iShares Global Consumer Staples ETF (KXI)

Energy: iShares Global Energy ETF (IXC) & Energy Select Sector SPDR Fund (XLE)

Healthcare: Health Care Select Sector SPDR Fund (XLV) & iShares U.S. Healthcare ETF (IYH)

If you prefer to hold individual stocks, you can look at the top 10 holdings of the ETFs and then do a deeper dive on those companies.  One easy way to do so is to put the ETF ticker symbol in Yahoo! Finance, click on the Holdings tab, and examine the top holdings of the ETF.  For example, the two consumer staple ETFs mentioned above both have the same four holdings in their the top five: Procter & Gamble Co (PG), Coca-Cola Co (KO), PepsiCo Inc (PEP), and Walmart Inc (WMT).

It goes without saying, but I’ll still say it: there’s no guarantee that stock prices in these industries will not also fall in a recession.  That said, adjusting your investment strategy from time to time based on your expectations for the economy should be considered.  At EsqWealth, we believe that your financial plan should always be evolving based not only on major changes in your life, but also based on what is happening in the economy past, present, and future. 

The information above is not intended to and should not be construed as specific advice or recommendations for any individual. The opinions voiced are for general information only and are not intended to provide, and should not be relied on for tax, legal, or accounting advice. To discuss specific recommendations for any unique situation, please feel free to contact us.

Recent Articles