Key points to remember
- When consumers spend less, profits slow, forcing companies to cut costs and adopt a more defensive stance.
- For some industries, consumers will continue to spend, which means businesses will not be affected by the recession.
- Investors should look to industries that provide the goods and services people need to find good stocks to invest in, regardless of the state of the economy.
When you hear of an impending recession, you immediately conjure up images of people and businesses struggling as the economy slows. These images might even come to you in black and white.
While this is the case, not all businesses are affected to the same degree. Some businesses even thrive during a recession. Here’s a look at why some businesses are hurt during a recession and other industries thrive.
What is a recession?
A recession is a period of economic decline usually called when there are two consecutive quarters of negative gross domestic product (GDP) growth. Some experts believe that the unemployment rate must rise sharply on top of the negative GDP figures for this to be a true recession. An inflationary environment often precedes recessions, further dampening consumer spending.
The National Bureau of Economic Research (NBER) Business Cycle Dating Committee is the official body that predicts a recession. He defines a recession as “a significant decline in economic activity spread across the economy that lasts for more than a few months.” The committee doesn’t have hard and fast rules for calling a recession, but it places the most weight on personal income.
Why Most Businesses Suffer During a Recession
The American economy runs on capitalism, which has simple inputs and outputs. A business opens to provide a good or service, and consumers pay for their purchases with their income, either budgeted or discretionary. The business makes a profit for each sale, while the consumer gets something that satisfies their needs or wants. As the business grows, it hires and pays employees who then spend their earnings. These employees are also consumers, and consumer spending drives the US economy.
Businesses can expect stable sales and profits in a normal economy where inflation is minimal and people have reliable incomes. Inflation upsets this balance by causing prices to soar and reducing the purchasing power of the average consumer.
For example, a consumer spends $75 per week on groceries, with an average cost of $3 per item. The consumer goes home with 25 items. Inflation drives the average price of an item to $5, so the consumer takes home 15 items. That’s 10 items left on the shelf – items that would have sold out during a normal economy. In short, a recession interrupts the reliability of a company’s earnings.
The retailer must decide whether to hold their prices at the current level to maintain profitability or to list the items for sale and make less profit in order to move their inventory to avoid a total loss on those items.
Different Types of Businesses That Thrive During a Recession
People need certain types of services to support their daily lives. Life becomes more difficult without them, and certain aspects of society would literally collapse without them. Here is an overview of some of the services that are not significantly affected by a recessionary environment.
Daycare centers will always be in demand as parents need someone to look after their children while they work. This is true for both single-earner and two-earner households.
The only investment option for a purely childcare-centric stock is Bright Horizons Family Solutions. They operate daycare centers and early childhood education centers in the United States, Canada and Europe. Since it is the only publicly traded stock in the sector, it is difficult to evaluate it against its peers. However, finances are strong and the business plans to expand in the coming years.
The repair services category covers everything from automobiles to major appliances. When something breaks down, it needs to be fixed. People repair things to save money and extend the life of their possessions.
Therefore, repair services are always in demand, as well as qualified technicians. In fact, the demand for repair services increases during a recession due to consumers choosing to repair instead of replace when cash is tight.
Most repair services are small local businesses. Very few are large publicly traded companies. But that doesn’t mean there aren’t stocks to invest in, you just have to think outside the box a bit.
For example, you could invest in Home deposit or Lowes to take advantage of people repairing and upgrading their homes. Many consumers are opting to do-it-yourself over buying a new home during a recession.
Also, you can consider Advanced Auto Parts because people repair their vehicles instead of buying new ones.
Death is an unfortunate fact of life, and funeral homes are a necessary provider. Funeral costs have increased as environmental laws make burial more expensive. More and more people are being cremated.
While many funeral homes are privately owned, some operators are publicly traded. One of the best is Services Corporation International. They provide death care services including cremations, funerals and cemeteries. While the S&P 500 is down about 20% for the year, this stock has held steady.
A few other stocks in this industry include AlderwoodsGroup, Carriage Services and Stewart Enterprises.
Trash haulers take away daily, people and businesses will sacrifice in other areas of their lives before leaving without removing their trash. This industry is recession proof.
Waste Management and Republic Services are two carriers that handle removal for residential, commercial, and municipal customers, helping the company spread its risk against those that only serve residential customers.
Republic Services operates nationwide and is the second largest waste collector in the United States. It has a solid earnings history and a positive outlook on future earnings.
Cigarettes and alcohol
While people will cut back on discretionary spending during a recession, they generally won’t cut back on vices like cigarettes and alcohol. In the case of cigarettes, the people who buy are addicted to nicotine, they will first reduce their expenses in other areas.
Same for alcohol. Although consumption may decrease a little, it will not decrease significantly, let alone dry up.
Altria is a cigarette company that has had its ups and downs recently, but it’s still a solid stock that pays a strong dividend. The biggest challenge Altria faces is government regulations on cigarettes and e-cigarettes, which has negatively impacted Altria with its planned purchase of Juul Labs.
If you’re looking for liquor stock, Constellation Brands produces beer, wine, and hard liquor. Some of its brands include Corona, Wild Horse Winery and Svedka Vodka. The company has strong finances and will benefit from a strong or weak economy.
If you’re an investor looking to make money during a recession, or at least limit your losses, look at the industries that people can’t live without, regardless of how the economy performs.
If you need help determining where to invest, you can save time by using an investment kit from Q.ai. These themed kits are designed to take the guesswork out of investing. Some themes include Inflation protection, Valuable Safeand Sweet sins. You can even opt for portfolio protection to further limit downside risk.