Investing during a recession: Consumer Staples
When the economy experiences a downturn, many investors become fearful and hesitant to invest in the stock market. Some even end up liquidating their investments at a loss. Even though it is difficult to select the winners when the whole economy is experiencing a contraction, economic history has shown that some sectors and specific asset classes or styles have weathered economic recessions better than others. On this occasion, let’s explore the expected outcomes of investing in Consumer Staples during a recession.
What are Consumer Staples?
Consumer Staples are products that people use regardless of the economic environment. These products include food, beverages, household items, and personal care products. Some examples of consumer staple companies include Walmart, Procter & Gamble, Coca-Cola, PepsiCo.
Why are Consumer Staples a good investment during a recession?
During an economic recession, the first thing people usually cut back is discretionary spending such as travel, entertainment, and luxury goods. However, we all still need to purchase essential goods such as food, household items, and personal care products. As a result, Consumer Staples companies tend to be benefited or are less affected by economic downturns compared to other sectors.
Additionally, Consumer Staples companies often have strong brand recognition and pricing power, which means they can maintain their pricing or increase it without experiencing a decrease in demand. This can result in steady revenue and earnings growth, making them a desirable investment option, especially in moments when most other sectors are experiencing the exact opposite.
Consumer Staples are known to be defensive stocks because they hold up better during market downturns. This is because they are less susceptible to economic cycles and changes in consumer behavior. During a recession, proactive investors allocate their portfolios to defensive stocks to protect their investments from market volatility while capturing some capital appreciation and dividend income.
Let’s look at some numbers
Going back into economic history just to cite a recent example, we will find that the recession of 2008 lasted around 18 months (from Dec 2007 — Jun 2009). During this period the S&P 500 experienced a return of -35% while at the same time, the US Staples experienced a -9% return. The S&P 500 took more than 4 years to recover from the bottom back to the top, while the US Staples took less than 2 years. This means that those investors who bought Staples right at the top (worst case scenario) had to wait 2 years to be back to even on their portfolios, much better than those who invested in the S&P 500 at the top and had to wait for 4 years to be at even. By the time those holding the S&P 500 got back to even, investors in Staples had already accumulated around 30% returns at the same time.
What are the risks?
While Consumer Staples may be considered a safe investment during a recession, there are still risks involved. For example, if a recession lasts for an extended period, consumers may start to trade down to cheaper brands or store brands to save money. This could result in a decline in revenue and earnings for Consumer Staples companies.
In addition, Consumer Staples companies may also face increased competition during a recession, as other companies try to enter the market to capture market share which could lead to pricing pressures and decreased profitability.
Takeaway
Investing in Consumer Staples during a recession can be a wise decision, as these companies tend to be less affected by economic downturns compared to other sectors. They offer stability and consistent earnings growth, making them a desirable investment option. However, it is important to keep in mind the risks involved, such as increased competition and consumer behavior changes. As with any investment decision, it is important to do your research and consult with a Financial Advisor before making any investments.
THIS IS NOT INVESTMENT ADVICE
This article expresses my own opinion. Nothing contained in this article should be construed as investment advice.
