In Search Of Recession-Proof Stocks? Here Are Some Places To Look As A Recession Nears

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There’s been talk about the possibility of a recession for much of this year, but the number of potential signals continues to rise, ratcheting up pressure on the recession debate. In fact, hedge fund legend Stanley Druckenmiller is warning of a hard landing next year with the possibility of a deeper recession than most expect.

Meanwhile, JPMorgan strategists say the fact that stocks are in freefall means that a recession is imminent, and Ned Davis Research has set its expectation of a recession at 98.1%.

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With all these warning signs, investors are looking for places to hide their wealth and protect it from a steep downturn. As a result, the need for recession-resistant stocks and sectors hasn't been this high in a long time.

The Latest On The Recession Debate

At CNBC's Delivering Alpha Investor Summit on Wednesday, Druckenmiller said he expects the Federal Reserve's aggression aimed at reining in inflation will lead to a hard landing by the end of 2023 — followed by a recession. The billionaire investor added that he would be "stunned" if there is no recession next year, although he doesn't know the exact timing.

Druckenmiller added that he wouldn't be surprised if next year's recession isn't "larger than the so-called average garden variety." He also said he doesn't "rule out something really bad" coming next year.

As many others have suggested, Druckenmiller expects the Fed's extraordinary easing measures and zero interest rates over the last 10 years have driven a record-long bull market, creating a massive asset bubble in the process.

However, he also pointed out that the Fed is now reversing its accommodative policy rapidly. Druckenmiller noted that all the factors that cause a bull market are reversing, adding that "we are in deep trouble."

Meanwhile, in a recent note, Ned Davis Research wrote that its Global Recession Probability Model now sits at 98.1%. The only other times the firm's indicator was at that level were in 2020 and 2008 to 2009.

However, Ned Davis Research disagrees with Druckenmiller on the severity of the coming recession, saying that most asset classes have priced in a moderate rather than a severe recession.

Additionally, JPMorgan sees a 92% probability of a recession in the U.S., a dramatic increase from the August reading of 51%. The firm added that base metal prices suggest a 96% probability of a recession.

Recession-Proof Investments? There's No Such Thing

As asset prices reprice dramatically, there is virtually nowhere for investors to hide from a recession. Gold, the traditional safe-haven asset, has plummeted over the last six months, even falling below $1,700 an ounce, dipping as low as $1,650 this week.

Bitcoin, which many crypto enthusiasts have tagged as "digital gold" or even better than gold, is showing a glimmer of hope, although it remains hugely volatile.

The crypto markets rejoiced when bitcoin topped $20,000 again briefly on Tuesday, but it plunged just as suddenly as it had surged, falling back under $19,000. On Wednesday, bitcoin was on the rise again, although it failed to even approach $20,000 as of the time of this writing.

Many investors look to the stock market for places to hide, searching for recession-proof stocks, but it's important to realize that no stock is recession-proof. Instead, it's crucial to search for resistance to a recession, and there are some sectors that do fit that description.

Recession-Resistant Sector: Pet Care

For example, one area many investors don't think about is pet care. Studies have shown that spending on pet care not only holds up well during a recession but actually increases.

One study showed that consumer spending in the U.S. during the Great Recession fell 3% overall, but spending on pets continued to rise steadily, reaching an annual rate of 5%.

Of course, although pet care is a recession-resistant sector, not every stock looks like a good pick right now. For example, Chewy Inc (NYSE:CHWY), which may be seen as the Amazon of pet care, is exposed to the entire industry. The online retailer sells everything from pet food to prescription items like heartworm protection and everything in between.

Unfortunately, Chewy shares are down more than 40% year to date, but that plunge could present an attractive entry point for investors.

Chewy looks like a long-term play due to its lack of profitability because Wall Street is punishing money-losing companies right now. However, it appears to have a bright future, and given its position in a recession-resistant sector, this could be a buy-the-dip opportunity.

Recession-Resistant Sector: Auto Parts

Another recession-resistant sector is auto parts. In fact, this sector looks even more attractive than during other recessions due to the parts and labor shortage in the auto industry. Suddenly, drivers are forced to keep their cars for much longer than they usually would, meaning that demand for auto parts has skyrocketed.

O'Reilly Automotive Inc (NASDAQ:ORLY) looks like a solid play right now, and it's actually in the green year to date, albeit only by 2%. The retailer has an exceptional profit margin, giving it further support at a time when Wall Street is punishing unprofitable companies.

Advance Auto Parts also looks solid, although it shifted into negative free cash flow, making it look less attractive than O'Reilly. Nonetheless, it may be worth watching to see how its cash position evolves in the coming months.

Finally, Autozone is also holding up well in the current bear market, having gained 4% year to date.

Final Thoughts

Of course, pet care and auto parts are not the only sectors that hold up well during a recession. Consumer staples do well because people still need the basic necessities during a recession, even if they can't afford discretionary items.

Grocery stores and discount retailers are also recession-resistant, as are alcoholic beverages, cosmetics, utilities and transportation.

While it has been significantly more challenging to pick winners this year than it has been during the euphoria of the last bull market, investors can protect their wealth if they know where to look.

Additionally, it's a good idea to look at a recession as an opportunity to buy solid stocks with a bright future at a discount.