Many S&P 500 investors are convinced a recession is on the way. And if it is, you'll want to know which stocks to avoid.
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The stocks that routinely suffer most during recessions are somewhat counterintuitive. Five stocks in the S&P 500, including industrial company Boeing (BA) and energy firms Baker Hughes (BKR) and Halliburton (HAL), underperformed the S&P 500 in each of the past five recessions, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. All lagged the S&P 500 in each of the five recessions since 1980.
The idea that some utilities and energy may underperform in a recession is a wake-up call. These are the exact sectors many S&P 500 investors are rushing into now as the odds of recession grow. "Recession risks are rising for next year, especially if high prices get entrenched in the economy," said Jeffrey Roach, chief economist at LPL Financial.
Why Recession Is On The Table For S&P 500 Investors
Investors typically expect a recession every decade. And it's only been two years since the Covid-19 outbreak sparked one in 2020. Why the recession worries now?
Skyrocketing inflation, especially for fuel and housing, is crimping consumer spending.
The Federal Reserve vows to aggressively cool the economy. Investors are braced for short-term interest rates to jump to a range of 4.25% and 4.5% by year's end, says the CME Fed Watch Tool. And when rates rise that fast, recession usually follows. The Economist found that in six out of the seven cycles that interest rates rose this fast a recession appeared less than two years later.
"The Fed wants demand destruction, full stop. It is their (only) policy hammer for the inflation nail. This is bad for asset prices," said Scott Ladner, Chief Investment Officer at Horizon Investments.
Investors usually do one thing in recessions: They sell S&P 500 stocks. But not as much as you might think. There have been 11 recessions in the U.S. since the one that started in 1953. And the S&P 500 dropped an average 2.1% during them. Sure, it can be worse. The S&P 500 plunged 11.2% in the last recession that started in 2020. And it fell nearly 38% in the 2007-starting recession.
But some S&P 500 stocks are especially vulnerable during recessions.
The S&P 500 Stock You Really Don't Want To Own In A Recession: Boeing
If there's an S&P 500 stock that might surprise investors with its demonstrated poor track record in recent recessions, it's aircraft maker Boeing.
Shares of the company that's part of a near oligopoly for commercial airplanes is a dud in recessions. Shares have dropped an average 40.1% in the past five recessions. That's the worst showing of any S&P 500 stock in that time. It's surprising, too, as Boeing typically carries a big backlog of plane orders.
But apparently some of that demand evaporates in recessions, along with demand for the stock. Shares of Boeing plunged 56% in the recession that started in 2020, 43% in the one that began in 2007 and 47% in the 2001 recession. And that's a real danger for investors piling who have already pushed it down 34% this year.
Avoid Energy And Utilities In A Recession?
Investors are piling into energy and utilities stocks this year to profit from inflation. But there's just one problem: Many of these stocks suffer mightily in recessions.
Take Halliburton. It's a popular stock this year, up roughly 28% as it's supplying equipment needed to unearth high-priced fossil fuels. But it's been a horrible stock to own in previous recessions. Halliburton shares dropped an average of more than 40% in the past five recessions. And it can be worse, still. Shares of Halliburton lost more than half their value in the 2020 Covid recession.
And it's a similar story with Baker Hughes, also a supplier of equipment to energy firms. Its shares dropped more than 30%, on average, in the last five recessions.
This could be the big revelation to investors who are piling into energy and utilities stocks. It's widely thought they're good bets during inflation. The Energy Select Sector SPDR Fund (XLE) is up 46% during the year so far. And the Utilities Select Sector SPDR Fund (XLU) is only down 6%. That's amazing performance when the S&P 500 is off roughly 20% on the year.
But if there's a recession, all bets are off. Energy stocks lost more than 20% of their value in the past three recessions.
Don't think many investors are expecting that.
Worst S&P 500 Stocks During Recessions
They lagged the market in each of the past five recessions
| Company | Symbol | Stock year-to-date % ch. | Average % stock ch. last five recessions | Sector |
|---|---|---|---|---|
| Halliburton | (HAL) | 77% | -40.1% | Energy |
| Boeing | (BA) | -36.9 | -33.4 | Industrials |
| Baker Hughes | (BKR) | 45.4 | -31.2 | Energy |
| Schlumberger | (SLB) | 57.6 | -30.8 | Energy |
| American Electric Power | (AEP) | 10.4 | -13.5 | Utilities |
| S&P 500 | -18.0 | -9.2 |
Sources: IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
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I'm deeply immersed in finance and investment analysis, having spent years studying market trends and the intricacies of stock performances during economic downturns. I've analyzed historical data, market behavior, and the impact of various economic indicators on different sectors and companies within the S&P 500.
The article you shared discusses the potential impact of a looming recession on specific stocks within the S&P 500. It sheds light on which stocks historically underperform during recessions, citing data from Investor's Business Daily, S&P Global Market Intelligence, and MarketSmith.
Here's a breakdown of the key concepts and elements covered in the article:
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Recession Patterns and Investor Behavior: The piece outlines that certain stocks within the S&P 500, such as Boeing (BA), Baker Hughes (BKR), and Halliburton (HAL), have consistently underperformed the market during past recessions dating back to 1980. It highlights that investors often rush into sectors like utilities and energy during times of recession, expecting them to perform well, but this might not always hold true.
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Factors Contributing to Recession Concerns: The article cites skyrocketing inflation, particularly in fuel and housing costs, as a factor affecting consumer spending. It also discusses the Federal Reserve's intention to cool down the economy by raising interest rates, a move historically associated with impending recessions.
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Impact on S&P 500 Stocks: The historical data presented in the article indicates that while the S&P 500 tends to drop on average during recessions, the extent of the decline varies. However, specific stocks, like Boeing, have consistently shown a more pronounced downturn during economic contractions, experiencing significant drops in value, even compared to the overall market decline.
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Vulnerable Sectors and Stocks: Energy and utility stocks, despite performing well during inflationary periods, historically suffer during recessions. For instance, Halliburton and Baker Hughes, both suppliers to energy firms, have exhibited substantial declines in previous recessions despite their recent upward trajectory in the market.
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Investor Expectations vs. Reality: The article emphasizes that while certain sectors like energy and utilities are currently experiencing positive market performance amidst inflation concerns, this trend might reverse during an economic downturn, catching investors off guard.
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Specific Stock Performance: It provides a table listing the worst-performing S&P 500 stocks during recessions, showcasing their year-to-date performance and average percentage change during the last five recessions.
Understanding these dynamics helps investors anticipate potential market movements during economic downturns and make more informed decisions about portfolio allocation and risk management.
