Are you looking for the best investments in a recession? Though no one can predict exactly how macroeconomic forces will play out, you can safeguard your financial future by allocating assets in recession resistant classes. Read on to learn four of the best investments during a recession.
Recessions are generally defined as two successive quarters of declining GDP (gross domestic product. As of June 8, 2020, the U.S. officially met this criterion.
How deep or how long this recession will last is never easy to answer. In fact, it wasn’t leading indicators like a declining stock market, a drop in manufacturing activity, sluggish retail activity or inverted yield curves that predicted this recession.
It was a virus that nobody had ever seen before or heard about that caused it. One day the economy was roaring on all cylinders and the next it was dead in the water. This is definitely not your typical recession. But nevertheless, here we are. And recessions are destructive.
That’s why so many investors are looking to diversify into recession proof investments. When you take a deeper dive into the subject, one thing becomes clear – there is no such thing as an absolutely recession proof industry. Nevertheless, there are sectors that have historically been thought of as recession resistant.
Many of those industries revolve around basic needs and necessities.
Commercial Multifamily Real Estate
Commercial real estate is one of the best investments in a recession, but not all classes of real estate do well. In fact, one stands out head and shoulders above the rest.
In bad economies, consumers cut back. That decline in spending negatively impacts retail sales. Businesses go under leading to a softening in the office and industrial markets. As a result, business travel slows leading to an uptick in hotel vacancies. New development (construction) slows as well.
Recessions lead to layoffs, foreclosures, and other economic hardships. In these times, people look for lower cost housing. This downsizing causes demand for apartments to increase. Shelter is a basic need after all and not something people can easily do without.
This historic result coupled with today’s demographic drivers and decreased supply of workforce (B-grade apartments) housing makes those invested in commercial multifamily real estate uniquely positioned to benefit in both recessionary and non-recessionary environments. This stability is one of the many reasons why smart investors should invest in real estate.
National Real Estate Investor Magazine agrees. Their February 2019 article proclaims, “The U.S. Apartment Sector Would Continue to Remain Strong Even in a Recession.”
“The apartment sector overall is likely to weather a recession well. An economic downturn could steer more potential residents to apartments instead of for-sale homes or condominiums.”
“Since middle-tier to lower-end apartment properties are jam-packed full right now, occupancy could backtrack moderately and property owners still would be in good shape by historical standards.”
In addition to multifamily, storage units tend to do well in recessions. This makes sense as downsizing households look to store their excess, nonessential possessions.
Discount retail is one of the best investments in a recession. Luxury items are among the first things to go during recessions. People quickly decide they don’t have to drive a Mercedes, eat at Ruth’s Chris, or shop at Nordstrom.
That’s why luxury brands like Nordstrom got crushed during the Great Recession as demonstrated by their stock price. On February 2, 2007, it closed at $56.68 only to freefall down to $11.37 by November 28, 2008. That’s more than an 80% decline.
Just because people abandon their luxuries in a recession, doesn’t mean they don’t consume. During recessions, consumer staples and low cost convenience items remain in demand.
In comparison to Nordstrom, consider the stock prices for these discount retail brands during the same time period:
- Walmart $48.08 (2/2/07) $55.88 (11/28/08) +16.2%
- Dollar Tree $10.58 (2/2/07) $11.76 (11/21/08) +11.2%
- TJ Maxx $7.02 (2/9/07) $5.71 (11/28/08) -18.7%
In general, discount retail saw either modest gains or shallower losses than the broader market.
Many people consider utilities to be a recession proof investment. After all, people still need water, gas, and electricity in unfavorable economic times. That’s not to say that utilities don’t necessarily go down, the trough just isn’t as deep.
Utilities are a sector within the S&P 500. As such, we can look at their performance in comparison to that overall index. For example, from September 18, 2014 to October 14, 2014, the S&P 500 fell -7.4%. Utilities gained 1.3% during that same time period.
The S&P 500 declined -18.3% from July 22, 2011 to October 3, 2011, but utilities only dropped a mere -2.9%.
And finally during the heart of the Great Recession, in 2008, the S&P 500 plummeted -37% for the year. Utilities beat that by 8% losing a total of -29%. It was the third best (or should I say least worst) performing sector during that terrible year.
The fact that, even in economically distressed times, people still need to heat their homes, take showers, and keep the lights on insulates utilities during recessionary times.
Consumer staples are essential products or household necessities making them recession resistant investments. Many of these items are sold at discount retail stores. These are things like beverages, toilet paper, food, and other personal care items.
These are items that people cannot or will not limit even in recessionary times. For that reason, these items are non-cyclical and tend to do well in recessions. Let’s repeat the above exercise for some well-known suppliers of consumer staples.
- Coca-Cola $23.88 (2/9/07) $23.44 (11/28/08) -1.8%
- Proctor & Gamble $65.34 (2/2/07) $64.35 (11/28/08) -1.5%
- Kimberly-Clarke $66.58 (2/2/07) $55.39 (11/28/08) -16.8%
When you compare that to the broader S&P 500 index performance during that same time period, it becomes clear just how beneficial consumer staples can be in a recession.
- S&P 500 $1,448.39 (2/2/07) $896.24 (11/28/08) -38.1%
Business Insider looked at the performance of consumer staples in 2015 and found that they had beaten the S&P 500 by 49% over a 25-year period. However, most of that outperformance was due to their strength during three recessions.
Best Investments In A Recession
Recessions are destructive beasts that are highly unpredictable. Just like bull markets can’t last forever, recessions can’t either. The economy is cyclical in nature and future recessions are inevitable. Were you prepared for the pandemic driven recession? Will you be prepared for the next one? Does your portfolio include some of the best investments in a recession?
We strongly believe commercial multifamily real estate is the best investment through a recession. If you’d like to learn more about diversification into this asset class, visit how to invest in commercial real estate or schedule a 15-minute consultation with us.