- When consumers spend less, profits slow, forcing companies to cut costs and take a more defensive stance.
- For some industries, consumers will continue to spend, which means businesses won’t be hurt by the recession.
- Regardless of the state of the economy, investors need to research industries that provide goods and services that people want to find good stocks to invest in.
When you hear about an impending recession, you immediately conjure images of people and businesses struggling as the economy slows. These images may even be black and white.
While this is the case, not every business is affected to the same degree. Some companies even thrive during recessions. Here’s why some businesses hurt during recessions while others thrive.
What is a recession?
When gross domestic product (GDP) has two consecutive quarters of negative growth, it is often called a recession. Some experts believe that, in addition to negative GDP, unemployment would need to rise sharply to be a true recession. Inflationary environments typically precede recessions, further slowing consumer spending.
The National Bureau of Economic Research (NBER) Business Cycle Dating Committee is the official agency that declares recessions. It defines a recession as “a significant decline in economic activity across the economy, lasting more than a few months.” The committee doesn’t have a hard and fast rule about declaring a recession, but it does give top priority to personal income.
Why Most Businesses Hurt During Recessions
The American economy is based on capitalism with simple inputs and outputs. A business starts offering a good or service, and consumers pay for the purchase out of their income, budget, or discretionary income. Businesses make a profit from each sale, and consumers get what they need or want. As the business grows, it hires and pays employees who continue to spend their earnings. Those workers are also consumers, and consumer spending drives the U.S. economy.
In a normal economy where inflation is minimal and people have reliable incomes, businesses can expect steady sales and profits. Inflation tipped this balance by causing prices to soar and reduce the spending power of the average consumer.
For example, consumers spend $75 a week on groceries, with an average spend of $3 per item. The customer takes home 25 items. Inflation causes the average price of an item to soar to $5, causing the consumer to take home 15 items. That’s 10 items left on the shelves — items that would have sold under normal economic conditions. In short, recessions interrupt the reliability of corporate profits.
Retailers must decide to keep their pricing at current levels to maintain profitability, or mark down items and reduce margins to shift inventory to avoid a total loss of those items.
Different Types of Businesses That Thrive During a Recession
People need certain types of services to support their daily lives. Without them, life would be much more difficult, and without them, certain aspects of society would collapse. Below are some services that have not been significantly impacted by the recessionary environment.
As long as parents need someone to care for their children while they are at work, day care will always be in short supply. This is true for both single and dual income households.
The only investment option in purely childcare-centric stocks is Bright Horizons Family Solutions. They operate childcare and early learning centers in the United States, Canada, and Europe. Since it’s the only publicly traded stock in the industry, it’s difficult to value it against its peers. However, the financial situation is strong and the company plans to expand in the coming years.
The repair service category covers everything from cars to major home appliances. When something breaks, it needs to be repaired. People repair things to save money and extend the life of things.
Hence, there is always a need for repair services as well as skilled technicians. In fact, demand for repair services increases during recessions as consumers opt for repairs rather than replacements when money is tight.
Most repair services are small local businesses. There are very few large public companies. But that doesn’t mean there aren’t stocks to invest in, you just have to think outside the box.
For example, you could invest in Home Depot or Lowes to take advantage of people repairing and updating their homes. Many consumers are choosing the DIY route rather than buying a new home during the recession.
Also, if people are repairing their vehicles rather than buying a new one, you might consider Advanced Auto Parts.
Death is an unfortunate fact of life, and funeral homes are essential providers. Funeral costs have also increased due to environmental laws making funerals more expensive. As a result, more and more people were cremated.
While many funeral homes are private companies, some operators are public companies. One of the best companies is International Services. They provide funeral services, including cremation, funerals, and cemeteries. The stock has been flat even as the S&P 500 has fallen about 20% this year.
Some other stocks in the sector include Alderwoods Group, Carriage Services and Stewart Enterprises.
Trash haulers pick up trash every day, and people and businesses make sacrifices in other areas of life before leaving to remove trash. This industry is recession proof.
Waste Management and Republic Services are two haulers that handle relocations for residential, commercial, and municipal customers, helping companies spread their risk compared to 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 for future earnings.
cigarettes and alcohol
While people cut back on discretionary spending during a recession, they typically don’t cut back on vices like cigarettes and alcohol. As far as cigarettes are concerned, people who buy them are addicted to nicotine, and they will first reduce their expenditures in other areas.
The same goes for alcohol. Consumption may be reduced a bit, but not drastically, let alone exhausted.
Altria is a cigarette company that has seen its ups and downs lately, but it’s still a solid stock that pays a high dividend. Altria’s biggest challenge is government regulation of cigarettes and e-cigarettes, which has negatively impacted Altria’s planned acquisition of Juul Labs.
If you’re looking for alcohol inventory, Constellation Brands produces beer, wine and spirits. Some of its brands include Corona, Wild Horse Winery and Svedka Vodka. Companies that are in good financial shape benefit regardless of whether the economy is strong or weak.
the bottom line
If you’re an investor looking to make money or at least limit losses during a recession, research the industries people can’t live without no matter how the economy is performing.
If you need help figuring out where to invest, you can save time with Q.ai’s Investing Toolkit. These themed toolkits are designed to take the guesswork out of investing. Some topics include inflation protection, value vaults, and guilt. You can even opt for portfolio protection to further limit downside risk.