Which sectors hold up best during a recession and why?

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AcadiFi · Accepted Answer

Recessions — NBER-defined periods of GDP contraction — punish almost all equities on an absolute basis, but sector dispersion is huge. Defensives provide relative shelter, not absolute positive returns.

Top performers (relative, measured across 1990, 2001, 2008, 2020 recessions):
- Consumer Staples: +11.6% excess return vs. S&P. Demand for food, beverages, and household essentials is price-inelastic.
- Healthcare: +8.9% excess. Drug consumption is non-discretionary; Medicare spending is counter-cyclical.
- Utilities: +7.4% excess. Regulated returns, high dividend yields attract capital seeking stability.
- Telecommunications: +4.3% excess. Phone and internet are treated as necessities.

Laggards:
- Financials: -12.8% excess. Credit losses surge, NIM compresses, regulatory capital strain.
- Industrials: -9.4% excess. Capex delayed.
- Materials: -8.7% excess. Commodity demand drops.
- Real Estate: -11.2% excess (2008 especially brutal; 2020 less so due to housing strength).
- Consumer Discretionary: -6.8% excess.

Example — Ardmoor Wealth Management's 2008-09 positioning. Entering the recession 60% overweight Staples, Healthcare, and Utilities, the portfolio declined 18% vs. S&P's 37% drawdown — a 19-point defense that preserved client capital and allowed aggressive redeployment into discretionary and financials at the March 2009 trough.

Important distinction: 'defensive' does not mean uncorrelated. In a panic like March 2020, correlations go to 1 and everything sells off together for 2-4 weeks. The relative outperformance emerges over the full recession window.

Another angle — high-dividend-yield stocks within cyclicals sometimes outperform. A 6.5% yielder in Industrials might outperform a 0% yielder in the same sector. Yield provides an income cushion that lowers beta.

Which sectors hold up best during a recession and why?

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