Types of Stocks That Will Survive Economic Downturns

It took nearly 18 months for the stock market to go from its high in October 2007 to its low in March 2009, losing 50% of its value along the way. In 2020, it took about four weeks for the market to lose 32% of its value from the S&P high of 3,380 on February 19, to the low of 2,393 on March 19, with wild swings along the way. For investors, this was a very unpleasant roller-coaster ride, as opposed to a leisurely trip down on the elevator.

COVID-19 caused the market’s third entry into bear territory since the bull market began in March 2009. The good news is that the market recovered 50% of its losses by April 28, opening at 2,909 despite the widespread damage inflicted by the coronavirus pandemic. It held steady through May 11, 2020, when it opened at 2,915.

Investments for a Volatile Market

Conventional wisdom would have investors moving into the defensive sectors—health care, defense, utilities, consumer staples—and that has happened. However, these are not conventional times. Unemployment has skyrocketed to 14.7%, Congress activated a $2 trillion stimulus package with more on the way, oil prices have tanked, and interest rates have plummeted—all amidst a global pandemic. We're just starting to see the impact. Still, states are slowly reopening, and there's progress toward COVID-19 treatments and a vaccine.

In a bull market, it's a lot easier to pick stocks with the chances that you'll be right. In a volatile market, what stocks will do well in a recession or economic downturn? That depends on what you want to accomplish, and your appetite for risk.

Sectors and Industries

There are volumes of ongoing research and opinions for sector performance versus the market. The only consistent theme among them appears to be that the health care sector will outperform the market.

John Suddeth, chief investment officer of Naples Global Advisors, thinks that holding the defensive sectors for stability is still valid, but the upside may have passed because the pandemic has upended the traditional cycle.

"The defensive sectors proved to be the strongest at the worst of the crisis in March, with technology also in the mix as the cyclical outlier,” Suddeth told The Balance. “You needed to have exposures to those sectors in February for it to have mattered the most in March."

The opportunity appears to be in the most oversold sectors—travel, consumer discretionary, financials, and industrials—and history would seem to bear that out. Financials, consumer discretionary, and industrials have been the best-performing sectors six months after a recessionary bottom. Of course, each of these sectors has its own headwinds and challenges.

Consumer Discretionary 

Opportunities will emerge from leisure businesses, travel, hotels, and restaurants hit hard by shelter-in-place and social-distancing policies. The travel industry projected a loss of $400 billion in revenue in 2020 as a result of the coronavirus pandemic. The industry sees sharp recovery in the first quarter of 2021 from pent-up demand, with normal travel levels by 2023. The upshot? People want to travel and eat out after restrictions are relaxed.

Financials

Rising delinquencies on debt, credit cards, auto loans, business loans, and mortgages, plus low interest rates and loan growth are headwinds. The concerns about failure are not the same as in 2008 and 2009, because bank capital positions are much stronger, and the Fed has aggressively intervened to stabilize financial conditions by, among other things, providing up to $2.3 trillion in loans to support the economy. Historically, financials have performed well as recovery takes place.

Industrials

The sharp pullback in the economy has pounded the industrials in general, with travel reductions especially impacting airlines. Capital spending is at a standstill. Defense spending appears to be safe, at least for now. Industrials traditionally perform well early into recoveries because of low inventories and pent-up demand.

Health Care

The coronavirus pandemic has some negative implications for health care, just like everything else. Higher Medicaid participation because of job loss results in lower reimbursements. Allocating resources to COVID-19 also potentially disrupts other research and development. Fewer doctor visits, and lower test and prescription volumes may reduce billable services.

Nevertheless, the population continues to age, and the demand for services continues to rise. Innovations in medical technology, 3D printing, robotic surgeries, and artificial intelligence continue to develop and improve procedures and results.

Investing During and After an Economic Collapse

There are a lot of cross currents to contend with. For example, travel restrictions, social distancing, interest rates, permanent changes in the use of office space, and how consumers shop, just to name a few. Why sign on for that? Because the valuations remain attractive, and the pandemic has not changed the one universal truth of investing: buy low, sell high.

What to Look For

The broad sell-off has created "outliers." These are companies with strong balance sheets and staying power that have become more affordable to everyday investors. According to Suddeth, there are opportunities in the market.

"These are corporate gems with terrific balance sheets (low to no debt) that will allow them to survive when others can't, even coming out stronger with fewer competitors,” Suddeth said. “We are seeing that play out within beaten-up insurance, banking, travel, and real estate sectors."

What's Next

There's a lot on the horizon. The full impact of the pandemic, such as how people work, educate their children, travel, buy their groceries, and more, remains unknown. Supply chains have been altered, and innovations will come out of necessity. This is all the more reason to focus on companies with strong balance sheets and track records.

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