What is Recession Resistant?
A stock or other investment is recession resistant when it tends to rise in value when the economy falters (and the markets falter with it). Recession-resistant investments are usually countercyclical, meaning they tend to move in opposition to the overall business cycle.
How Does Recession Resistant Work?
When the economy is slowing, jobs become scarcer, wages stagnate, and consumers generally have less disposable income. They tend to limit their purchases of cars, travel and new houses and often shift to cheaper versions of items or experiences, shopping at cheaper stores, eating at cheaper restaurants, buying cheaper cars, and sometimes they start to fall behind in the bills. The companies that offer products or services in these areas therefore tend to be recession resistant. This is why discount retailers are usually countercyclical stocks, as are the stocks of alcoholic beverage producers and debt collectors.
Why Does Recession Resistant Matter?
As the economy slows, recession-resistant companies grow or at least maintain their ground. But they can really suffer during economic expansions (which can last for years).
Investing in recession-resistant securities in some ways assigns investors the arduous task of trying to time the market -- that is, to predict where the bottom of the business cycle is in order to sell at the optimal time and then predict where the top of the cycle is in order to buy at the optimal time. This can be hard, given the fact that some recession-resistant investments start sliding before a recovery actually begins.