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What Assets Are Recession-Proof?

Some investments are better than others during economic downturns.

Written by Devon Delfino / June 29, 2022

Quick Bites

  • Recessions are periods of widespread economic downturn, and can result in job losses and slowing revenue.
  • Cash (like an emergency fund), large cap stocks and gold can be good investments during a recession.
  • By contrast, certain stocks that tend to fluctuate with the economy and, more recently, cryptocurrencies, can be unstable during recessions.

In a recession, assets like stocks can often tumble as people stop spending, jobs are lost and companies pull back on investing. But there can be bright spots–or at least less ugly ones–in the market that can hold up well in a downturn. We’ll talk about what a recession is and which assets look best in dim times.

Inside this article

  1. What's a recession?
  2. Best assets in a recession
  3. Assets to avoid in a recession
  4. Investing during recessions

What’s a recession and are we headed for one?

A recession is a widespread economic downturn that typically lasts more than a few months.[2]

As the economy slows, businesses have less of a need to make goods and provide services, ensuing in layoffs or hiring freezes. People who are out of work typically rein in spending, slowing the economy further, and there’s your recession.

One of the commonly cited methods that experts use to identify a recession is by looking at the country’s gross domestic product (GDP), the value of goods and services produced in a country. If the GDP shows two consecutive quarters of negative growth, that’s often considered a sign of a recession.

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Ultimately, it’s hard to predict when a recession might come. Either way, it can help to make sure that your finances are in order in case something bad happens.

Which are the best assets to hold in a recession?

Cash

Cash is an important asset when it comes to recessions. After all, if you do end up in a situation where you need to pull from your assets, it helps to have a dedicated emergency fund to fall back on. Especially if you experience a layoff. In general, an emergency fund should cover at least three to six months worth of necessary expenses. (Think: Rent, utilities, food, medications, minimum debt payments, and the like.)

This way, if you do need to dip into your fund, you can allow your other investments to ride out market lows and thereby capitalize on long-term growth. Ideally, you’d keep these funds in a high-yield savings account, which is usually FDIC-insured.[6]

Large cap stocks

The asset classes that tend to perform best during recessions are from large, well-run companies that are highly-valued, according to Ariel Acuña, founder of LTG Capital, an investment advisor and wealth management firm based in Newton, Mass. “Companies that make products that consumers buy regardless of the economic environment—think diapers and utilities—do quite well because individuals continue buying them.”

Some of these types of stocks might include areas like:

  • Food

  • Personal care products

  • Healthcare

  • Utilities

“People need to eat, brush their teeth, go to the doctor and heat their homes whether the economy is strong or weak,” says Robert R. Johnson, a Chartered Financial Analyst and professor of finance at Creighton University. “That doesn't mean individuals won't change their spending patterns within a sector. For instance, with a weaker economy they may shift from steak to hamburger, or from shopping at Nordstroms to shopping at Walmart.”

Gold

Historically, during times of recession, the value of gold has tended to increase. For example, in 1976 to 1978, the S&P 500 fell 19%, while gold increased 54%.

In 2011, the S&P 500 dropped 19% and gold increased 9.4%. This trend isn’t universal (gold did dip when you look at the recession in the early 1980’s, and the late 90’s), but in general it holds true. So gold can make a sensible investment during these times of economic turmoil.[7]

“During recessions, when paper assets like stocks and bonds are depressed, companies and employees feel the pressure, and they tend to run to the safety of gold which explains its surge,” says Joseph Sherman, chief executive officer of Gold Alliance, a precious metals supplier. “Gold is really a bet against the dollar. And during recessions, when faith in the Federal Reserve is low, people will tend to put their faith in non-fiat currencies that are not backed by what they perceive as failing central bankers and governments.”

What should you definitely avoid holding in a recession?

Cyclical firm stocks

On the other side of the stock coin are firms that tend to fluctuate alongside the economy. Johnson describes these as “firms whose profits are strongly correlated to the overall economy” which “tend to perform well when the economy is thriving.” So when the economy takes a dive, these stocks tend to follow that trend.

Sectors for these types of firms include:

  • Construction

  • Manufacturing

  • Travel

  • Leisure

“Companies that make discretionary products or services tend to suffer in a recession because they may be the first things consumers cut back on,” says Acuña.

Cryptocurrency

Cryptocurrency is a digital currency, an alternative form of payment created using encryption technologies, meaning that cryptocurrencies function both as currency and as virtual accounting systems. Examples include Bitcoin and Etherium. Cryptocurrencies are generally unregulated, uninsured and difficult to convert into real cash. They can be extremely volatile, as we’ve seen of late with the value of cryptos dropping to two-year lows.[8,9]

“There is no more speculative asset class today than cryptocurrencies,” says Johnson. “The rise of cryptocurrencies during the Coronavirus pandemic was fueled by unprecedented amounts of liquidity infused into the financial markets by the Federal Reserve. So, my belief is that one of the worst asset classes to hold during a recession are the highly-speculative cryptocurrencies like Bitcoin and Ethereum.”

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An important note about investing during recessions

It can be tempting to overhaul your investing strategy, or even move out of the stock market altogether, if you feel like a recession is imminent. But doing so can translate to significant losses. So it’s important to maintain a long-term perspective.

“All market setbacks are temporary because the market, in its almost 200 year history, always has gone on to higher highs,” says Acuña. “Rather than being scared out of participating in a weak or declining market resulting from a recession, accumulators should view lower prices as opportunities to buy assets at prices they may never see again.”

Talking to a qualified financial professional, like a certified financial planner, can help you create a well-balanced, diverse investment strategy that can weather a recession.

Article Sources
  1. “Glossary: Recession.” Bureau of Economic Analysis. April 13, 2018. https://www.bea.gov/help/glossary/recession.
  2. “Business Cycle Dating Procedure: Frequently Asked Questions.” National Bureau of Economic Research. July 19, 2021. https://www.nber.org/business-cycle-dating-procedure-frequently-asked-questions.
  3. “Gross Domestic Product.” Bureau of Economic Analysis. May 26, 2022. https://www.bea.gov/data/gdp/gross-domestic-product.
  4. “Business Cycle Dating Committee Announcement July 19, 2021.” National Bureau of Economic Research, July 19, 2021. https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021.
  5. “2022Q1 (Second Estimate) Comparisons -- Percent Change from Preceding Period in Real Gross Domestic Product and Related Measures. Bureau of Economic Analysis, May 26, 2022. https://www.bea.gov/sites/default/files/2022-05/hist1q22_2nd.pdf.
  6. “High Yield Savings Account: What it is and How it Works.” Synchrony Bank, May 12, 2022. https://www.synchronybank.com/blog/what-is-a-high-interest-savings-account/.
  7. “Gold and Silver During a Recession.” Suisse Gold. https://www.suissegold.eu/en/posts/gold-and-silver-during-a-recession.
  8. “The Basics about Cryptocurrency.” Oswego State University of New York. https://www.oswego.edu/cts/basics-about-cryptocurrency.
  9. “Bitcoin.” Coindesk. https://www.coindesk.com/price/bitcoin/

About the Author

Devon Delfino

Devon Delfino

Devon Delfino is a writer who’s covered personal finance—including everything from student loans to budgeting to saving for retirement and beyond—for the past six years. Her financial reporting has appeared in publications like the L.A. Times, U.S. News and World Report, Teen Vogue, Masha

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