What Types of Stocks Are Good to Buy During a Recession?

The topic of a recession has weighed heavily on the minds of the American public and the American investor for quite a while now – and for good reason.

Although we can find a sliver of good news here and there, the gist of the matter is that both the cost of living crisis, inflation, and the Fed’s raising of interest rates aren’t coming to a close any time soon. None of these facts bode well for investors in the immediate term. In fact, most economists believe that we are headed for recession sooner rather than later – if we’re not already in one now.

Is this bad news? Undoubtedly. Yet we’ve been here before, and we’ve made it out before – so let’s focus on actionable advice the everyday investor can take to preserve their capital.

There are a number of proactive steps an individual can take to prepare their personal financial situation for a situation. But while emergency funds, cutting down on expenses, and paying off debts are all positive moves, one key question remains for the DIY investor: What are the ideal types of stocks to buy in a recessionary environment?

Is There Really Such a Thing as Recession-proof Stocks?

The short answer to this question is no – there isn’t a single stock that will remain completely unaffected by wider macroeconomic downturns. In and of itself however, this shouldn’t dissuade you from investing in the stock market during an economic downturn.

With the proper approach, investors can do more than scrape by in economic downswings. Although it might seem unlikely, achieving more than just capital preservation during a recession is certainly possible.

So, what’s the key to spotting such diamonds in the rough? It all comes down to the specific sector in which the business operates. Some sectors sustain or even improve revenue during a recessionary environment.

This is a part of fundamental analysis – so let’s quickly clarify how this works.

Factors to Consider When Analyzing Stocks

Fundamental and technical analysis are the two crucial approaches used by investors to analyze stocks.

While both methods of analysis are significant and can help identify which direction a stock is more likely to go, it’s really fundamental analysis that’s more valuable to investors amid an economic downturn.

Fundamental analysis is a method which takes macroeconomic factors into account, such as the wider state of the economy, the strength of the industry, and the financial statements published by a particular company.

In this field, some of the most important factors to consider are:

• Earnings and Revenue Growth: In a recession, look for companies with consistent earnings and revenue growth. These firms tend to have a stronger financial position and are more likely to withstand economic downturns.
• Price-to-Earnings (P/E) Ratio: The P/E ratio compares a company’s stock price to its earnings per share. In a recession, focus on companies with lower P/E ratios, as they tend to be undervalued and present a better investment opportunity.
• Debt-to-Equity Ratio: Companies with lower debt-to-equity ratios are generally in a better financial position to weather a recession. High levels of debt can increase the risk of bankruptcy and limit a company’s ability to invest and grow.
• General macroeconomic factors, including GDP growth, changes in the consumer price index, and changes in interest rates – and how these can impact consumer spending in the sector that the company operates in.

Technical analysis, on the other hand, looks at historical price action. It is primarily used by day traders, and while it is an effective approach, short-term trading in a recession isn’t an approach that meshes well with the risk tolerance most investors have. Nonetheless, a few metrics should be understood at a minimum in order to understand a stock’s current momentum.

These include:

• Relative Strength Index (RSI): The RSI measures the momentum of a stock’s price movements. During a recession, look for stocks with RSI values below 30, as this indicates they may be oversold and due for a rebound
• Volume Analysis: Trading volume measures how many units of a security were traded in a specific timeframe. In a recession, strong volume during upward price movements can be a positive sign, indicating increased buying interest.
• Moving Averages: Use moving averages to smooth out price fluctuations and identify trends. In a recessionary environment, focus on stocks that remain above their long-term moving averages, as this indicates relative strength

Stocks that Historically Perform Well During a Recession

Now that we’ve gone through the methodology that should be used to identify good investment opportunities, let’s narrow down the search. Although there are standout companies in every sector and industry that will outperform the competition in a recession, looking at historical data can clue us in as to which industries as a whole outperform the market in a…