Not All Sectors Are Created Equal When It Comes To Times Of Recession

Not All Sectors Are Created Equal When It Comes To Times Of Recession
Stéphane Renevier, CFA

almost 2 years ago2 mins

The chart above shows the median performance of different sectors in the periods before, during, and after a recession: six months before it starts, six months after it starts, six months before it ends, and six months after it ends.

Energy has historically been the strongest-performing sector in the lead-up to a recession, with a median gain of almost 9%. This shouldn’t come as much of a surprise, since recessions tend to be driven by high inflation, which is in turn driven by high energy prices. But the performance of the sector quickly turns negative once the recession starts, and remains so till it ends. So while energy might be a good bet in the short term, you’ll want to exit as soon as the tide turns.

But if trying to time the start of a recession isn’t your thing, you do have another option: you could buy consumer staples and health care stocks, which perform well both before and during the recession. That’s because demand for their products tends to remain robust: people still need food and medical care when times are tough, after all. You will, however, need to time the end of the recession, since both sectors’ performance starts to dip as soon as it tails off.

If there’s one sector that you want to give a wide berth, it’s real estate: it’s not only suffered a historical decline of 10% in the run-up to a recession, but also significant losses during (though it’s worth noting that the performance of real estate hasn’t been tracked in as many recessions as some other sectors, so there are fewer data points to go off). Financials and consumer discretionaries are likewise best avoided ahead of and during the first six months, although the latter tends to rebound strongly as the recession approaches its end.

Of course, you could also look at this the other way around: take a look at which sectors are currently performing well or not, and use that to assess how likely a recession is. And with energy and materials the biggest winners over the past three months, and tech and consumer discretionary the biggest losers, you might get a sense of which direction we’re headed…

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