Economic cycles, with their inherent phases of expansion and contraction, are an undeniable feature of modern economies. Recessions, formally defined as periods of significant decline in economic activity spread across the economy, represent the contraction phase and are typically characterized by falling gross domestic product (GDP), rising unemployment, and often, heightened stock market volatility. While predicting the precise timing and depth of these downturns remains a formidable challenge, understanding how different assets behave during such periods is a cornerstone of prudent investment strategy. History demonstrates that while recessions are disruptive, they also provide valuable insights into the resilience of various market sectors and investment characteristics.

If you have been reading our past articles, you should know by now that recessions are actually great opportunities to purchase fantastic companies at reasonable prices, provided that their investment thesis (especially their probability of survivors) remains intact. Hence, the real answer to the question “which companies should I buy during a severe downturn” is in general  “the same as before”. This assumes however that you still have a long-term horizon in front of you for your portfolio to converge back to its trajectory. Unfortunately, many people do not have that luxury: think about people close to retirement, or young couples waiting for the deed of a house to purchase. 

Hence, we deemed it is useful to analyse which stocks did perform well during recessions, for you to avoid panicking and stop buying stocks as planned, so that you may focus on those which should remain more stable. We will present an analysis of 3 major recessions: the dot-com bubble of 2001, the Global Financial Crisis of 2008, and COVID-19 of 2020. Please note that amongst these companies, we still recommend you to check the same profitability metrics we have been discussing, to make sure our core investment philosophy remains intact. 

Economic cycles, with their inherent phases of expansion and contraction, are an undeniable feature of modern economies. Recessions, formally defined as periods of significant decline in economic activity spread across the economy, represent the contraction phase and are typically characterized by falling gross domestic product (GDP), rising unemployment, and often, heightened stock market volatility.1 While predicting the precise timing and depth of these downturns remains a formidable challenge, understanding how different assets behave during such periods is a cornerstone of prudent investment strategy.4 History demonstrates that while recessions are disruptive, they also provide valuable insights into the resilience of various market sectors and investment characteristics.

Anatomy of Downturns: 2001, 2008, 2020

The first recession of the 21st century officially lasted eight months, from March 2001 to November 2001. Despite the shallow overall economic decline, the period was marked by a severe bear market, particularly in technology-related stocks. The primary cause was the bursting of the speculative "dot-com" bubble that had inflated dramatically in the late 1990s. This bubble was fueled by a confluence of factors: widespread enthusiasm for the new possibilities of the internet, an abundance of venture capital chasing ".com" names, market overconfidence often detached from traditional valuation metrics like profits and assets (termed "irrational exuberance" by then-Fed Chair Alan Greenspan), and relatively low interest rates facilitating investment. The impact was devastating for the Technology and Communication Services sectors. The technology-heavy Nasdaq Composite index, which had soared nearly sevenfold from 1995 to its peak above 5,000 in March 2000, plummeted by approximately 77% to its trough in October 2002.

Lasting 18 months, the recession that began in December 2007 and ended in June 2009 was the longest and, until the pandemic, the deepest economic downturn in the United States since World War II. The crisis originated in the US housing market. When US house prices began to fall in 2006-2007, homeowners started defaulting on mortgages, particularly subprime ones. This triggered large losses for institutions, leading to uncertainty about the solvency of major financial firms. The S&P 500 Index suffered a peak-to-trough decline of 57% between October 2007 and March 2009.

The recession triggered by the COVID-19 pandemic was unprecedented in several ways. Unlike previous downturns driven by internal economic imbalances (like tech speculation or housing finance), the 2020 recession was caused by an external shock – a novel global pandemic. The stock market experienced a rapid crash between late February and March 2020, followed by an equally swift start to recovery in April 2020, fueled partly by unprecedented fiscal and monetary policy responses, including stimulus payments, expanded unemployment benefits, and massive central bank interventions.

The Defensive Playbook: Resilience Under Pressure

During periods of economic contraction and market volatility, investors often seek refuge in "defensive" sectors. These are areas of the market traditionally considered less sensitive to the fluctuations of the broader economic cycle. The perceived safety of these sectors is rooted in fundamental economic principles and structural industry characteristics:

• Inelastic Demand / Essential Services: The core driver of resilience is the nature of the goods and services these sectors provide. Consumers continue to purchase essential items like food, beverages, personal care products, and household goods (Consumer Staples) even when budgets tighten. Similarly, demand for healthcare services, medications, and medical devices (Healthcare) persists regardless of economic conditions, as health needs are non-discretionary. Finally, the so called sin stocks (e.g. tobacco) show inelasticity due to the nature of their products, often stemming from habit or addiction. This contrasts sharply with cyclical sectors like Consumer Discretionary, where purchases of items like cars, luxury goods, travel, and entertainment are often deferred during downturns.

• Stable Cash Flows & Dividends: Consistent demand translates into more predictable revenue streams and earnings for companies in defensive sectors, particularly for established players. This financial stability often allows these companies to maintain, and sometimes even increase, their dividend payments during recessions. For investors, these dividends provide a source of return when capital appreciation may be scarce and can act as a cushion, mitigating stock price decline. As a YAINer, you should know that we always look for companies with increasing cash-flows, not just during recessions.

A key characteristic often associated with resilient companies, particularly in defensive sectors, is a strong history of paying and potentially growing dividends, even through economic contractions. This signals financial stability and a commitment to returning value to shareholders, providing investors with a tangible income stream when capital gains are uncertain. Examining the dividend records of prominent companies within defensive sectors during the 2001, 2008, and 2020 recessions illustrates this point. Please note that some of these stocks did experience to some extent downturns during the previous crisis and their inelasticity is by no means guarantee that they won’t fall during the next ones. Their dividend growth is a testament that as companies (not stocks) they were still performing well and generating income for their investors.

• Walmart ($WMT ( ▼ 0.78% )): As the largest US retailer, Walmart's discount model often benefits during recessions as consumers prioritize value. It was a top Dow performer during the GFC 10 and outperformed the S&P 500 in both 2008 and 2020. Its dividend history shows consistent payments and increases through these periods. 

• Unilever ($UL ( ▼ 1.68% )): This global giant owns a vast portfolio of essential food, refreshment, home care, and personal care brands (e.g., Dove, Hellmann's, Ben & Jerry's, Axe/Lynx, Lifebuoy). While direct stock performance comparisons vary, the company's focus on staples and brand strength allows it to maintain sales and raise prices even during challenging periods. Unilever has a long history of dividend payments. 

• Johnson & Johnson ($JNJ ( ▼ 0.23% )): A highly diversified company spanning pharmaceuticals, medical devices, and consumer health products. $JNJ has one of the longest dividend growth records globally. 

• UnitedHealth Group ($UNH ( ▼ 1.32% )): A leading managed care and health insurance provider. It was a top Dow performer during the GFC. While its dividend history is shorter than $JNJ, it has grown rapidly.

• NextEra Energy ($NEE ( ▼ 0.39% )): One of the largest US electric utilities, with significant investments in renewable energy.52 NEE outperformed the S&P 500 in both 2008 and 2020 and has a consistent record of dividend growth.

• British American Tobacco ($BTI ( ▼ 0.94% )) and Philip Morris International ($PM ( ▲ 0.1% )), often maintain stable profits and dividends even during economic downturns. Their performance reflects the consistent consumer demand characteristic of sin stocks.

Building a Resilient Portfolio

Unless you have short-term needs, your primary focus should be ensuring that the investment thesis & and the probability of defaults of the companies you selected is intact. If that is the case, you may completely disregard any other considerations and keep on purchasing aggressively the companies you love at discounted prices. However, this may not apply to everyone, so a closer look to more specific sectors may be beneficial.

The analysis of the 2001, 2008, and 2020 recessions confirms the historical tendency for defensive sectors – Consumer Staples and Healthcare – to exhibit greater resilience than the broader market. This resilience is primarily driven by the inelastic demand for their essential goods and services, leading to more stable revenues and cash flows even during economic downturns. Many established companies within these sectors further bolster their defensive credentials through consistent and often growing dividend payments, providing a valuable income stream during periods of market stress, as evidenced by the dividend histories of firms like Walmart, Johnson & Johnson, and Unilever.

However, the analysis also reveals critical nuances. Defensive sector outperformance is not guaranteed in every recession, nor is the relative ranking of these sectors consistent. The unique nature of the 2001 tech bust and the 2020 pandemic shock led to different performance dynamics compared to the 2008 financial crisis. Furthermore, resilience can be found outside the traditional defensive sectors, with areas like discount retail and auto parts often benefiting from recessionary consumer behavior, and specific technology segments proving vital during the pandemic.

Perhaps the most significant caveat is the underperformance in recoveries of defensive companies. Defensive stocks and sectors, by their nature, tend to lag the broader market during economic recoveries and bull markets. As investor confidence returns and economic growth accelerates, capital typically rotates back towards more cyclical and growth-oriented sectors that offer higher potential returns. Investors who remain heavily positioned in defensive assets may miss out on substantial gains during market upswings. This creates a market timing challenge: shifting too early out of defensives can expose a portfolio to further downside, while shifting too late means sacrificing recovery potential. Consequently, a purely defensive strategy maintained throughout an entire economic cycle is likely to underperform a more balanced approach over the long term.