What Is Recession-Proof?

Recession-proof assets are more resilient during a recession than other assets are. During a recession, they typically don't decline in value, or if they do, they decline less than the broader market. Some may even make gains during a recession.

Securities that are believed to be recession-proof often have negative beta values (such as gold)💜, which ꦛwould indicate an inverse relationship to the broader market.

What "Recession-Proof" Means

Although many items have bꦐeen labeled as recession-proof, very few ꦆturn out to be so. Quite often, the long-reaching consequences of a recessionary period are too much for even the most recession-proof businesses or assets to withstand.

Even equities, which are supposedly the most sensitive assets during a recession, are not always predictable. Several recessions (for example, 1945, 1949, and 1980) saw price increases for the 澳洲幸运5官方开奖结果体彩网:S&P 500.

Negative Beta

Securities that are believed to be recession-proof often have negative beta values. This indicates an inverse relationship to the greater market. That is, when the market goes ෴down, the stock goes up, and vice ✤versa.

It was once believed that gold and gold stocks were recession-proof due to gold’s negative beta value. Physical gold has performed well in some economic downturns, but this generally occurs under specific circumstances such as expected high 澳洲幸运5官方开奖结果体彩网:inflation. Also, holding assets with negative beta during non-recessionary times reduces the 澳洲幸运5官方开奖结果体彩网:expected return of the portfolio.

An asset with a negative beta has an expected return below the risk-free rate during normal times. Recession-proof ♛investments often underperform when there isn't a recession.

Defensive Industries

澳洲幸运5官方开奖结果体彩网:Defensive stocks, like shares of healthcare or utilities companies, are often cited as recession-proof investments. This is because no matter the economic situation, consumers still need to purchase medical care and electricity. However, many defensive industries represent a small percentage of consumer spending, li🅰miting their recession-proofing value.

Recession-Proofing a Portfolio

Several factors can be used to safeguard an overall portfolio against a recession, including asset 澳洲幸运5官方开奖结果体彩网:diversification, 澳洲幸运5官方开奖结果体彩网:rebalancing, and a long 澳洲幸运5官方开奖结果体彩网:investment timeline. Increasing the amount of cash holdings in a portfolio is also a good way to protect it against a recession, at the 澳洲幸运5官方开奖结果体彩网:opportunity cost of forgone returns. This enables investors to access 澳洲幸运5官方开奖结果体彩网:liquidity quickly to 澳洲幸运5官方开奖结果体彩网:take advantage of a falling stock market. Cash benefits from 澳洲幸运5官方开奖结果体彩网:deflation in a recessionary environment, as the purchasing power of 𒉰each dollar rises.

澳洲幸运5官方开奖结果体彩网:U.S. Treasury bonds are considered recession-proof because they are backed by the government of the world’s biggest economy.

Examples of Recession-Proof Assets

In the stock market, several companies and sectors are considered recession-proof because they can buck the doဣwnward slide of the market or have a relatively lower percentage decline compared with other sectors or indices.

An example of the former is 澳洲幸运5官方开奖结果体彩网:Walmart Inc. (WMT). The Arkansas-based giant reported 澳洲幸运5官方开奖结果体彩网:growth in profits and revenues in the three years following the 澳洲幸运5官方开奖结果体彩网:Great Recession. Consumers cut back on their spending and shopped at discount retailers, who upped their game by using their 澳洲幸运5官方开奖结果体彩网:economies of scale to drive lower prices for products.

澳洲幸运5官方开奖结果体彩网:Utility stocks are an example of the༺ latter. The reasoning for considering utilities a safe bet during a recession is that people൲ still need to pay their water and electric bills during a recession.

Investors and traders are often less interested in utility stocks because they are less volatile than the rest of the market and offer fewer chances for making money in a short time. However, utilities are among the couple of sectors where it is possible to park money safely during a recession. While other sectors could dip into negative territory or▨ fall by double-digit figures in a recession, utility stocks may remain꧂ relatively stable.

The Bottom Line

It is the rare exception for a stock to rally substantially during a recession, when the rest of the market is taking a nosedive. If a stock does break the pattern and rise in a falling market, it is most likely due to a stock-specific factor, such as a merger or an increase in the stock’s dividend, for example.

Still, if you’re intent on maintaining your allocation to stocks, you would do well to consider sector rotation, where you move your holdings out of more volatile growth stocks and into less volatile defensive, dividend-paying stocks such as utilities, consumer staples, an🍌d healthcare. These sectors have the best opportunity to hold steady and possibly advance, depending on the severity of the recession at hand.

If you’re more flexible in your asset allocation, you might consider increasing exposure to bonds (澳洲幸运5官方开奖结果体彩网:bond prices rise as interest rates fall, as they typically do during a recession) and dividend-paying stocks as fallback investment vehicles.