Using Defensive Stocks to Recession-Proof Your Portfolio (2024)

FAQs

Do defensive stocks do well in recession? ›

Pros of defensive stocks

But due to the consistently in-demand nature of goods and services associated with defensive stocks, they're seen as less likely to drop in value during a stock market downturn or a recession. Another advantage of defensive stocks' low volatility is predictability.

Defensive stock refers to the shares of a company that show very little volatility irrespective of the movement of the market. In other words, they remain stable regardless of the economic state. These stocks do not get affected by economic cycles; therefore, they are also referred to as non-cyclical stocks.

Bonds and cash have historically outperformed most stocks during recessions. Selling stocks in favor of bonds and cash before a recession may leave you unprepared if stocks bounce back before the economy does, which has happened historically during many recessions.

A recession is “a significant decline in economic activity spread across the economy, lasting more than a few months.” Industries affected most include retail, restaurants, travel/tourism, leisure/hospitality, service purveyors, real estate, & manufacturing/warehouse.

Investors typically flock to fixed-income investments (such as bonds) or dividend-yielding investments (such as dividend stocks) during recessions because they offer routine cash payments.

What history tells us about markets and recessions. Markets don't always decline in recessions. The average decline for the S&P 500 during the past nine recessions is 1.5% while the median decline is 3.4%.

During a recession, stock prices typically plummet. The markets can be volatile with share prices experiencing wild swings. Investors react quickly to any hint of news—either good or bad—and the flight to safety can cause some investors to pull their money out of the stock market entirely.

While it's tempting to sell your investments due to fears of an economic downturn, this is usually a bad idea. In fact, it's generally better to stay the course, maintain your investments, and even consider increasing the amount of money that you put into the stock market.

Is cash King during a recession? ›

For investors, “cash is king during a recession” sums up the advantages of keeping liquid assets on hand when the economy turns south. From weathering rough markets to going all-in on discounted investments, investors can leverage cash to improve their financial positions.

For example, you'll want to avoid becoming a co-signer on a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt. Workers considering quitting their jobs should prepare for a longer search if they decide to find a new one later.

If they think times are going to be harder than usual, they will migrate toward defensive stocks. Defensive stocks tend to perform better than the broader market during recessions. However, during an expansion phase, they tend to perform below the market. That is attributable to their low beta or market-related risk.

What are some examples of businesses that thrive in recession? Due to the elasticity of demand, recession-proof industries are usually in essential services, like health care, senior services, grocery stores, and maintenance, such as plumbing and electrical.

Consumer staples, including toothpaste, soap, and shampoo, enjoy a steady demand for their products during recessions and other emergencies, such as pandemics. Discount stores often do incredibly well during recessions because their staple products are cheaper.

Blue-chip stocks are attractive to investors during recessions because they typically pay dividends, providing them with a tangible return in the form of income. Blue-chip stocks in recession-resistant industries tend to be especially stable, which can help lessen the blow of a market sell-off or recession.

Liquidity. Your biggest risk in a recession is the loss of your job, if you're still employed or semi-employed. If you need to tap your savings for living expenses, a cash account is your best bet. Stocks tend to suffer in a recession, and you don't want to have to sell stocks in a falling market.

How much money should you hold in a recession? ›

GOBankingRates consulted quite a few finance experts and asked them this question and they all said basically the same thing: You need three to six months' worth of living expenses in an easily accessible savings account. The exact amount of cash needed depends on one's income tier and cost of living.

When things are looking bleak, consider holding on to your investments. Selling during market lows can be one of the worst things you can do for your portfolio — it locks in losses. When the market evens out down the road, rebalancing may be in order.

Historically, it may be reasonable to expect car prices to drop in a recession. However, there may be other factors that could significantly affect your ability to get a deal on the car you want.

Because people have less money to spend, demand falls, taking the prices of many goods and services with it. Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same.

For calendar-year 2023, the consensus earnings estimate is for a 2% contraction. But that estimate is still coming down, and based on historical patterns, could continue to do so. I could imagine it turning out to be a 10%-contraction year. Sign up for Fidelity Viewpoints weekly email for our latest insights.

Depending on how far you look back, the average bear market could take anywhere from six months to three years for a full recovery.

Odds of a recession in 2023 hover at 64% amid bank failures and higher rates. Economists see jump in unemployment and major job losses over next 12 months.

Do millionaires keep their money in cash? ›

Many millionaires keep a lot of their money in cash or highly liquid cash equivalents. And they tend to establish an emergency account even before making investments. Millionaires also bank differently than the rest of us.

Yes, cash can be a good investment in the short term, since many recessions often don't last too long. Cash gives you a lot of options.

As a result, people may experience reduced income or financial hardship. Furthermore, during a recession, investments may lose value, and retirement savings may be impacted. This can have long-term implications for individuals' financial security, especially those nearing retirement age.

What can happen to your 401(k) in a recession? Unfortunately, a recession can hurt asset prices, and therefore your 401(k) balance. According to CFRA Research, an investment research firm, the S&P 500 has lost an average of 8.8% of its value during the four recessions since 1990.

There are several reasons to consider buying a home during recessions - the two main reasons are less competition and lower prices. There are also several potential drawbacks, like sky-high interest rates, a floor on pricing decreases and potential income changes if the U.S. does officially slide into a recession.

No. You should not withdraw money from your bank during an economic downturn if you wouldn't have done so during normal times. You should only make withdrawals from your bank during a recession if you need to spend it or reinvest it.

Reliable Cash Flows: Defensive companies generally have robust and reliable cash flows due to the consistent demand for their products or services. This stability in cash flows can contribute to the financial health of these companies, enabling them to weather economic downturns more effectively.

Defensive stocks are favored by investors during tough economic times as companies operating in the space feel little impact of the broader economic downturn. That's because they sell products and services whose demand remains almost unchanged due to their essential nature.

Avoiding highly indebted companies, high-yield bonds and speculative investments will be important during a recession to ensure your portfolio is not exposed to unnecessary risk. Instead, it's better to focus on high-quality government securities, investment-grade bonds and companies with sound balance sheets.

What should you not do in a recession? ›

When things are looking bleak, consider holding on to your investments. Selling during market lows can be one of the worst things you can do for your portfolio — it locks in losses. When the market evens out down the road, rebalancing may be in order.

10% Return for S&P 500 a Real Possibility by End of 2023

And in today's market, with its newfound emphasis on fundamentals, earnings really matter. Short of a recession — a very real possibility — consensus estimates are for about 5% earnings growth for S&P 500 companies in 2023.

Recession-proof businesses or industries are those that have inelastic demand. Health care, consumer staples, and transportation are all examples of industries whose demand does not change based on the state of the economy.