If there’s a US recession, which stocks will hold up best?

There has been increasing talk of a US recession in recent weeks, with one major global bank suggesting the odds of this are 60 per cent.

It’s certainly possible if harsh tariffs remain in place, although the outlook could brighten quickly if we see further de-escalation.

Recessions are an inevitable part of the business cycle, and the five biggest US sharemarket declines of the past fifty years all came during these periods.

They lead to higher unemployment, lower confidence, falling house prices and a decline in consumer spending.

This all feeds into weaker economic activity, pressuring corporate earnings and causing share prices to fall.

There have been four US recessions since the 1980s. There was the 1990 recession, the one associated with the dotcom crash in 2001, the GFC between 2007 and 2009, and the lockdown-induced COVID-19 recession of 2020.

The S&P 500 fell heavily in all of these, and all the main eleven market sectors declined.

However, the two sectors which proved to be most resilient are consumer staples and healthcare. On all four occasions, they outperformed the broader market.

That’s not surprising. Companies in these sectors tend to be lower risk, more defensive, and less exposed to the ebbs and flows of the economic cycle.

Consumer staples companies are in the business of necessity, and even during a recession we still buy shampoo and toilet paper.

Demand for healthcare services also tends to be quite stable, and its often the last thing we scrimp on if forced to tighten our belts.

At the other end of the spectrum is financials, which was the worst performing sector during those four recessionary periods.

While banks find themselves in vogue with investors in buoyant periods, they aren’t a great place to be during a downturn.

Bad debts tend to increase, and people hunker down rather than rushing out to borrow more money.

After financials, the next worst performer during past recessions has been technology.

That’s an interesting one, and the tech bulls will be quick to point out that these numbers were dragged down by the dotcom crash 20 years ago, when the sector was belted.

These days, some tech companies are almost utilities, which should see them hold up better during a rough patch.

Few businesses (or consumers, for that matter) could easily do without Amazon’s cloud services or the Microsoft suite of products.

Then again, the COVID-19 recession was an oddball one too.

That period saw tech stocks perform strongly because we were all stuck at home using online shopping and video conferencing.

In contrast to 2001, that example flatters the numbers for the tech sector in this analysis.

Stocks like those in the “Magnificent 7” have had a great run these last few years, and many are widely owned by investors.

That could make them a natural source of funds if investors wanted to take more risk of the table.

Looking at companies on a sector basis doesn’t work quite as well in New Zealand. Our market is much smaller, and the idiosyncrasies of individual stocks can distort things.

However, the same principles would apply.

One would expect the larger, more stable companies to hold up better in any downturn, while those tied more closely to the global economy or with a greater dependence on consumer spending could suffer more.

If the US is headed for recession, even a mild one, markets will remain under pressure.

The best defence for investors is to hold a little more cash than usual, add to good quality fixed income, and ensure share portfolios are widely diversified with a tilt to the more resilient sectors.

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