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key takeaways
- Profits slow when consumers spend less, forcing companies to cut costs and take a more defensive stance.
- For some industries, consumers will continue to spend, meaning businesses won’t be hurt by a recession.
- Regardless of the state of the economy, investors need to research industries that provide goods and services, and people need to find good stocks to invest in.
When you hear about an impending recession, you immediately think of pictures of people and businesses struggling as the economy slows. These images may even be presented to you in black and white.
While this is the case, not every business is affected to the same extent. Some companies even thrived during recessions. Here’s why some businesses hurt during the recession while others thrive.
What is a recession?
A recession is a period of economic downturn, commonly referred to as two consecutive quarters of negative gross domestic product (GDP). In addition to negative GDP figures, some experts believe unemployment needs to rise sharply to become a true recession. Inflationary conditions often precede recessions, further slowing consumer spending.
The National Bureau of Economic Research (NBER) Business Cycle Dating Committee is the official agency for declaring 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 for calling a recession, but it does place the highest priority on personal income.
Why Most Businesses Hurt During a Recession
The U.S. economy is based on capitalism, with simple inputs and outputs. A business opens to provide goods or services, and consumers use their income, budget, or discretionary income to pay for the purchase. Businesses make a profit from every sale, and consumers get what they need or want. As the business grows, it hires employees and pays them before spending their earnings. These 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 upsets this balance by causing prices to soar and reducing the purchasing power of the average consumer.
For example, consumers spend $75 a week on groceries, at an average cost of $3 per item. Consumers go home with 25 items. Inflation caused the average price of an item to soar to $5, causing consumers to take home 15 items. That’s the 10 items left on the shelf — items that would be sold in normal economic times. In short, a recession disrupts the reliability of corporate profits.
Retailers must decide to keep their pricing at current levels to maintain profitability, or sell items and reduce profits in order to shift inventory to avoid the full 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 harder, and without them certain aspects of society would collapse. Here are some services that are immune to the recessionary environment.
parenting
Daycare will always be in demand as long as parents need someone to take care of their children while they work. This is true for both single- and dual-income households.
The only investment option in a purely parenting-focused stock is Bright Horizons Family Solutions. They operate child care and early childhood 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 based on peers. However, the financials are strong and the company plans to expand in the coming years.
Maintenance service
The repair service category covers everything from automobiles to major household appliances. When something breaks, it needs to be repaired. People repair items to save money and extend the life of their property.
Therefore, repair services as well as skilled technicians are always welcome. 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 are no stocks to invest in, you just have to think outside the box.
For example, you can invest in Home Depot or Lowes to take advantage of people repairing and updating their homes. Many consumers choose the DIY route instead of buying a new home during a recession.
Also, if people repair their vehicles instead of buying new, you can consider Advanced Auto Parts.
funeral parlor
Death is an unfortunate fact of life and a funeral home is a necessary provider. Funeral costs have increased as environmental laws have made funerals more expensive. More people were cremated as a result.
While many funeral homes are private companies, some operators are publicly traded. One of the best is an international service company. They provide death care services, including cremations, burials, and cemeteries. While the S&P 500 is down about 20% this year, the stock has been flat.
Some other stocks in the sector include Alderwoods Group, Carriage Services and Stewart Enterprises.
garbage hauler
Trash movers take away every day, and people and businesses make sacrifices in other areas of their lives without removing trash before they leave. This industry is recession proof.
Waste Management and Republic Services are two haulage companies that handle relocations for residential, commercial and municipal customers, helping companies spread risk compared to companies that only serve residential customers.
Republic Services operates nationwide and is the second largest garbage 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. In the case of cigarettes, people who buy it are addicted to nicotine and they cut back on other areas first.
The same goes for alcohol. While consumption may decrease a bit, it won’t drop drastically, let alone dry up.
Altria is a cigarette company that has had its ups and downs of late, but it’s still a solid stock that pays a strong 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 liquor inventory, Constellation Brands makes beer, wine and spirits. Some of its brands include Corona, Wild Horse Winery and Svedka Vodka. Companies are financially healthy and will benefit regardless of whether the economy is strong or weak.
bottom line
If you’re an investor looking to make money during a recession, or at least limit your losses, there are industries people can’t live without regardless of how the economy performs.
If you need help figuring out where to invest, you can save time with Q.ai’s investment toolkit. These theme kits are designed to take the guesswork out of investing. Some topics include inflation protection, value vaults, and guilty pleasures. You can even choose portfolio protection to further limit downside risk.