Are There Any Recession Proof Industries?

Key Takeaways 

• An impending recession can impact investors significantly. Recognizing its signs and duration is crucial. 

• Certain industries like real estate, consumer staples, healthcare, IT, and financial services show resilience during recessions. 

• These recession proof industries typically cater to essential needs, have steady cash flows, and show adaptability. 

• Investment strategies like portfolio diversification and considering alternative investments can help mitigate risks. 

• Recessions, while challenging, can present opportunities for savvy investors to make potentially profitable investment decisions.

According to nearly all economic experts, the number one factor driving fear of recession has been record inflation, triggering record rises in interest rates. Inflation, interest rates, and the overall economy share a complex relationship that can influence each other in significant ways. 

Inflation and Interest Rates 

Inflation refers to the rate at which the general level of prices for goods and services is rising. Central banks, like the Federal Reserve in the U.S., closely monitor inflation rates. When inflation is high or rising rapidly, it could reduce the purchasing power of money and erode living standards, particularly for people on fixed incomes. 

To combat rising inflation, central banks often raise interest rates. This is because higher interest rates make borrowing more expensive. In theory, this discourages people and businesses from taking out loans, thus reducing the amount of money in circulation. 

Interest rates can influence the rate of inflation and the overall economy in two primary ways: 

Consumer Spending: When interest rates are high, people are more likely to save their money to earn interest rather than spend it. This reduced spending can lead to a decrease in demand for goods and services, which can eventually lead to a drop in prices. 

Business Investment: Higher interest rates also make it more expensive for businesses to borrow money to finance operations or expansion. This can result in reduced business investment, which can slow economic growth. 

Interest Rates and the Economy 

A cooling economy, or economic slowdown, often follows a period of tighter monetary policy, where higher interest rates have been implemented to curb inflation. As borrowing becomes more expensive and consumer spending decreases, businesses might experience decreased revenue. This can lead to cutbacks in production, hiring, and investment, further slowing economic activity. 

Over time, the reduced demand for goods and services brought about by higher interest rates can help to alleviate inflationary pressures. However, if not carefully managed, these dynamics could also lead to a recession, a period of significant decline in economic activity. 

Understanding Recessions: Duration and Identifying Indicators 

A recession typically lasts from six months to a year, but some have been known to extend longer, based on historical data. Key indicators that signal a recession include a drastic drop in Gross Domestic Product, a rise in unemployment rates, and a fall in the stock market, along with others. The federal government also plays a crucial role in identifying and declaring a recession. 

Gross Domestic Product (GDP): GDP is the total value of all goods and services produced by a country in a given period. It serves as a comprehensive measure of a nation’s overall production. If there is a significant drop in GDP that lasts for more than two quarters (or six months), it is one of the main signs that an economy is in a recession. 

Unemployment Rate: This rate represents the number of unemployed people as a percentage of the labor force. The labor force includes all people aged 16 and older who are either working or actively looking for work. During a recession, companies often lay off employees to cut costs, which raises the unemployment rate. Thus, a rising unemployment rate can be an indicator of a recession. 

Stock Market: The stock market doesn’t directly cause economic recessions, but it can significantly influence the onset of a recession. When stock prices fall dramatically, investors’ wealth decreases, leading to a decrease in consumer spending. This decrease in demand can contribute to an economic downturn. When the stock market crash is large and persistent, the confidence of investors and consumers can further decline, causing a negative cycle that contributes to a recession. 

Federal Government: The role of the government in declaring a recession is crucial. In the United States, recessions are officially declared by the National Bureau of Economic Research (NBER), a private non-profit research organization. The NBER considers various economic indicators, including GDP, employment, income, and retail sales, to determine the peaks and troughs of the business cycle. 

These indicators are deeply interconnected. A drop in GDP might lead to job losses, increasing the unemployment rate. A high unemployment rate means less consumer spending, causing drops in sales and negatively affecting businesses, often leading to a fall in stock market. The cycle continues, creating a cascading effect throughout the economy, which could lead to a recession if not addressed by monetary or fiscal interventions. 

Navigating through Recessions: The Role of Recession Proof Industries 

It is here that the concept of “recession proof industries” becomes paramount. Certain industries display a resilient performance during these economic downturns, thus termed as “recession proof.” They include: 

Real Estate: 

Real estate often remains stable during a recession for several reasons. Firstly, people always need a place to live, meaning there’s a continuous demand for residential properties. While the demand might decrease somewhat during a recession, it typically doesn’t disappear entirely. Secondly, commercial properties often have long-term leases, which helps protect the industry from short-term economic changes. Lastly, real estate can act as a hedge against inflation, which can often increase during or after a recession due to governmental economic stimulus measures. Because property values and the rents landlords charge can rise with inflation, real estate can be a good investment during these periods. 

Consumer Staples: 

Consumer staples include products that people need to live, such as food, beverages, hygiene products, and household items. Regardless of how the economy is performing, people still need to eat, maintain their hygiene, and keep their homes running. These needs create a steady demand for consumer staples, even during a recession. Therefore, companies that produce these products, or the stocks of these companies, can be a safer bet during an economic downturn. 

Health Care: 

Healthcare is a necessary service, regardless of economic conditions. People still fall sick, get injured, and need medical attention during a recession. In fact, the demand for healthcare can even increase during stressful economic times. Additionally, many healthcare costs are covered by insurance, government programs, or are legally required to be provided, which can help protect the industry from changes in consumer spending. As such, the healthcare sector can offer stability during a recession. 

Information Technology: 

Despite economic downturns, the demand for technology solutions and services often remains strong. This is due, in part, to the ongoing digitalization of society and the economy. Businesses and consumers alike rely on technology for productivity, communication, entertainment, and more. In fact, in a bid to reduce costs and improve efficiency during a recession, businesses may invest more in certain technologies. So, companies in this sector can thrive even in a recession. 

Financial Services: 

The financial services sector can be a mixed bag during a recession. While some areas may struggle, others can see increased demand. For instance, as businesses and individuals face financial hardship, they may turn to professionals for help in restructuring debts, which can boost demand for certain types of financial services like debt collection and bankruptcy services. Additionally, during a recession, there may be increased activity in countercyclical investments, like gold or fixed income products, which could benefit certain financial firms. Finally, central banks often lower interest rates during a recession to spur economic activity, which can boost the profitability of certain financial services, such as lending. 

Utilities: 

Utilities, including companies that provide electricity, gas, and water, tend to be relatively recession-proof. The demand for these services remains consistent, as they are fundamental to daily life and business operations. Even during a downturn, people need to heat their homes, keep the lights on, and have access to clean water. Additionally, these services are often regulated, which can provide a level of revenue stability. 

Education: 

In times of economic downturn, many people choose to return to school or pursue further education to increase their skills and improve their employment prospects. This can result in increased demand for educational services, including universities, colleges, trade schools, and online learning platforms. Additionally, public K-12 education is typically funded by government sources, offering a level of stability regardless of economic conditions. 

Government Services: 

Although not a traditional ‘industry’ in the business sense, the sector that includes government services often proves resilient during recessions. Government employees provide services that are critical to society, such as law enforcement, infrastructure maintenance, and regulatory oversight. While the public sector can experience budget cuts during a recession, critical services are typically maintained, providing a level of job security for individuals in these roles. 

Discount Retailers: 

Discount retailers, which offer low-cost consumer goods, often perform well during recessions. When economic times are tough, consumers tend to become more price-conscious and may switch from premium brands to less expensive alternatives. As a result, companies that offer discounted goods or operate in the ‘value’ segment of retail can see stable or even increased demand during a downturn. 

Environmental Services and Waste Management: 

Waste management is another industry that is largely resistant to recessions. Regardless of the state of the economy, waste is continually produced and needs to be managed. This provides a steady stream of demand for waste management companies. Similarly, environmental services such as pollution control and ecological consulting tend to remain stable, as regulations require businesses to maintain certain environmental standards, irrespective of the economic climate. 

Characteristics of Recession Proof Industries 

Cater to Essential Needs 

All ten of these industries provide goods or services that are fundamental to the functioning of society, irrespective of the economic situation. For instance, Consumer Staples and Utilities cater to everyday needs like food, personal care, electricity, and water. Health Care provides essential medical services that people require irrespective of their financial situation. Real Estate provides housing, a basic necessity. Education is considered essential for personal development and job prospects. The importance of these essential needs tends not to diminish during recessions, ensuring consistent demand. 

Steady Cash Flow 

Several of these industries exhibit a steady cash flow, even during economic downturns. Utilities, for example, typically have a constant demand and therefore a steady income stream. Real Estate, particularly rental properties, can provide regular cash flow in the form of rent payments. Waste Management companies also have regular contracts providing steady cash flow. Even in Financial Services, certain sectors like debt collection see a steady or increased demand during recessions. 

Resilience in Various Economic Times 

These industries have shown resilience in previous economic downturns. For instance, Discount Retailers often see stable or even increased sales during tough economic times as consumers become more price-sensitive. Education providers may see an influx of students during recessions as people seek to improve their skills or change careers. Similarly, Information Technology has demonstrated its ability to thrive even during economic downturns, given the integral role technology plays in our lives and businesses. 

Adaptability 

Industries that can quickly adapt to changing economic conditions often fare better during a recession. Information Technology is a prime example of this trait, as technological solutions can help other businesses reduce costs and improve efficiency during a downturn. Financial Services also show adaptability, as they can adjust their offerings based on economic conditions, such as providing more financial restructuring services during a recession. 

By understanding these common traits, investors can better assess which industries are likely to withstand economic downturns and make more informed investment decisions. 

Investment Strategies during a Recession 

While a recession can cause worry amongst investors, it’s essential to understand that there are strategies to mitigate risk and possibly even profit during these times. Diversification of one’s portfolio and considering alternative investments such as fixed income products can be an effective strategy. 

Recessions: A Possible Opportunity? 

Recessions can often provide opportunities for savvy investors. Hard times can bring about lower prices in public equity, allowing investors to purchase at discounted prices and hold for potential future gains.

Alternative Investments and Portfolio Diversification

Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially exceptional gains these investments presented were also limited to these groups.

To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

While a recession might be a daunting prospect, understanding the characteristics of recession proof industries can help investors navigate the rough seas of an economic downturn. By carefully planning their investment strategy and making informed choices, it is possible for investors to not just survive, but potentially profit from a recession.