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Recessions...not so bad after all? Tips for Recession-Proofing your Portfolio

Not only did the 4:00 ET closing bell this past Thursday on Wall Street signal the end of the daily trading session, but it also marked the end of the first half of 2022 and well—it’s safe to say that the market has had better starts to the year. A lot of them, in fact. The S&P 500 is down 20.6% YTD (worst start since 1970), the Dow closed 15.3% lower than the first day of the year (worst first half since 1962), and to top it all off the Nasdaq’s 29.5% decline YTD is actually its worst first half on record.

Investors are clearly feeling more spooked than usual these days as rumblings of recession are beginning to pick up steam. The sell-off has even begun to hit oil (cyclical sectors like energy tend to be more vulnerable during recessions/changes in economic activity) - while the energy sector is still up a whopping 29% YTD (and is the only S&P sector in the green), it’s 18% drop over the last month is the steepest decline of any sector during that time frame. The three best performing sectors over the last month have reputations as defensive industries (for reference: defensive stocks consistently pay dividends and provide stable earnings regardless of the market’s volatility), namely healthcare, consumer staples, and utilities, which were down 4.2%, 3.6%, and 6.4%, respectively. Historically, these sectors have shown to be very resilient during economic/market downturns. This stands to reason because even when your income decreases, you still need things like health care, food, clothing, water, and electricity in order to live. You may recall the term price inelasticity if you cracked open the textbook in your intro economics course…that’s the official title for the situation.

Now let’s take a look at the specific companies from these sectors that have fared the best in previous recessions.

Walmart (ticker: WMT)

During the Great Recession (spanning from December 2007-June 2009), Walmart’s stock achieved 9% in total returns (price plus dividends) while the S&P declined by 34%. This trend continued with the most recent recession spurred by the Covid-19 outbreak (lasting from February-April of 2020), where the price return of the stock was 15.2% (compared to the S&P 500’s 11.2% drop during those couple months). According to finance journalist Matt Krantz, Walmart’s stock has returned an average of 39.5% over the last five recessions. Recessions have shown a pattern of significantly altering people’s lifestyles and behaviour, which makes sense given that there’s usually a lot less money to go around. In such cases consumers either search for cheaper alternatives or buy fewer items. Discount retailers like Walmart thrive in this environment as they gain new customers who can no longer afford luxury goods. Furthermore, they don’t tend to sustain a noticeable dip in sales from existing customers as low-cost staple goods are often the last thing to be cut from budgets as people need them to survive. See Exhibit A for chart of Walmart’s stock price dating back to the Great Recession

Exhibit A

Amgen (ticker: AMGN)

In the healthcare department, look no further than Amgen, the largest biotechnology company on the planet (by revenue), which develops, manufactures, and distributes human therapeutics worldwide. The main areas of focus are inflammation, oncology/hematology, bone health, cardiovascular disease, nephrology, and neuroscience areas. During the Great Recession, Amgen stock’s price return was an astounding 27% (annualized ROI of 16.3%), and it continued to make its case for being a recession-proof stock in 2020 when the price return was 17.7% during the shortest recession on record (annualized ROI of 125.5%). The stock has even enjoyed tremendous success in 2022 relative to the overall market—it has returned 9% YTD compared to the S&P’s 20% drop. Clearly, it’s fair to say that even during times of economic hardship, cancer patients undergoing chemotherapy will cut back on essentially anything else before lifesaving medicines like Neulasta (one of Amgen’s top selling drugs that helps to prevent infections). See Exhibit B for chart of Amgen’s stock price dating back to the Great Recession

Exhibit B

Regarding utilities, although it is widely regarded as being a defensive industry (and it certainly has the numbers to back it up in terms of outperforming the S&P during recessions), I would stick to sectors like consumer staples and healthcare for the most part. Even when dividends are factored in, utilities are unable to compete with its counterparts from a return standpoint. Take the largest U.S. electric utility company (based on market capitalization) NextEra Energy (ticker: NEE), for example, which through its subsidiaries, generates, distributes, and sells electric power to retail and wholesale customers throughout North America. While the constant demand for power drove the stock to outperform the S&P 500 by double-digit percentages in the two most recent recessions (15% and 14% in 2008 and 2020, respectively), NEE’s shares were unable to deliver positive price returns in either period (i.e. if the S&P 500 decreased by 20% in 2008, NEE still declined by 5%). Several other major utility stocks suffered considerable losses in the Great Recession (see Exhibit C), which begs the question of just how defensive is the utilities sector after-all?

Exhibit C

There is no doubt that it’s tougher to have success in the stock market during recessionary periods; however, it is far from impossible. Quite the opposite, actually, as long as you invest in select companies and industries, like some of the ones listed above. While the circumstances of each recession are never exactly alike, these sectors of the market (especially consumer staples and healthcare) have proven that they can consistently provide a safe haven for investors when the economy declines.

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