Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 534

Best investments to own during a recession

The market has been anticipating a US recession for quite some time. Since July 2022, the US yield curve has been inverted, which has often been a precursor to recessionary periods. So far, a recession hasn’t materialised. Economic growth has remained strong, with generally positive corporate earnings reports and unemployment still close to historic lows.

But even if an economic slowdown isn’t imminent, there will be one eventually. The economy moves in cycles, with periods of economic strength followed by contractions and vice versa. Historically, recessions (generally defined as at least two consecutive quarters of declining growth in gross domestic product) have occurred about once every five to 10 years, although the length of time between recessionary periods varies.

It’s impossible to predict the timing or severity, but it’s often only clear that a recession has happened after the fact, or after the market has already started reacting to slower economic growth.

Looking at which types of investments have historically fared best during economic downturns can help limit some of the damage. In this article, I’ll look at investing during a recession from multiple angles, including asset classes, factors, and sectors. Though it's focused on the US, much of it is applicable to Australia too.

Asset classes

From an asset-class perspective, stocks are usually one of the worst places to invest during a recession. Recessions happen when there’s a decline in economic activity, which is usually accompanied by weaker trends in revenue and earnings growth.

Stocks had negative returns in most (but not all) previous recessions dating back to the Great Depression. Some of the worst recent results were during the GFC, when stocks lost an annualised 24% between late 2007 and mid-2009.

Total returns (%) by asset class

On the flip side, bonds have been the best place in most previous recessions. The Federal Reserve often cuts interest rates in an attempt to stimulate economic growth, also resulting in higher bond prices, with long-term bonds historically faring best during recessions, although intermediate-term bonds and cash have also been pretty resilient.

Gold has also been a winning asset class during recessionary periods, with positive returns during the eight most recent recessions since 1993. But the yellow metal had a relatively anaemic showing during recessions in the early 1980s and early 1990s, with returns were negative after inflation.

Investment style

I used Morningstar’s U.S. equity fund categories as a proxy for measuring investment style. As shown in the table below, growth stocks have typically held up better during recessionary periods. Companies that have growth-oriented stocks typically have higher earnings growth, cleaner balance sheets, and better profitability, all traits that often help them hold up better than companies with cheaper stock prices during recessionary periods. But growth stocks haven’t fared well during every recessionary period. Growth stocks were hit hard in the tech-stock correction in the early 2000s, which coincided with a brief recessionary period in 2001.

From a style perspective, large has generally been better than small during periods of economic weakness. Larger companies tend to have more stable earnings, diversified business operations, and the financial wherewithal to sustain their operations even during recessions. Smaller companies, on the other hand, may depend heavily on a single line of business and often have fewer financial reserves to sustain them during recessions.

Total returns (%) by investment style

Equity factors

Equity factors are another way of examining the drivers of equity market returns. Factors describe additional characteristics (beyond traditional metrics such as sector, market cap, and value/growth) that help to explain investment management styles and resulting performance differences.

Because equity market returns are generally negative during a recessionary period, no investment factor consistently generated positive returns. In relative terms, the quality factor has historically fared best during periods of economic weakness. Definitions for quality vary, but the MSCI index that I used for this study focuses on stocks that score well on three main metrics: high return on equity, stable year-over-year earnings growth, and low financial leverage.

Total Returns (%) by Investment Factor

The minimum volatility factor, which is designed to capture stocks with lower betas, volatility, and idiosyncratic risk, has fared second-best, and dividend stocks have also held up relatively well.

On the negative side, the value factor has performed the worst during most recessionary periods by a fairly wide margin. (Note: This benchmark for this factor is similar to the value fund categories I discussed above, but it has more extreme performance traits because it has a more pronounced value bent than the typical value fund.) The value factor tends to be overweighted in economically sensitive sectors, such as basic materials, consumer cyclicals, and financials. This is usually a negative, but the early 1980s’ recession—a “stagflation” period that featured sluggish growth, high inflation, and high unemployment rates—was an exception. The value factor posted the best returns during that period.

Equity sectors

From a sector perspective, healthcare and consumer staples stocks have been the most resilient performers during periods of economic weakness. Consumers can’t easily cut back on prescription drugs, medical devices, or household basics like canned goods and paper towels even if they’re feeling the effects of a weaker economy.

On the negative side, energy and infrastructure stocks have been the hardest hit in recent recessions. Companies in these sectors are acutely sensitive to swings in demand. Financials stocks also can suffer during recessions because of a rising default rate and shrinking net interest margins.

Total returns (%) by sector

Technology and communications stocks have a mixed record. During the 1990-91 recession amid the Gulf War and oil supply issues, the communications and technology sectors held up relatively well, and tech leaders such as Microsoft MSFT, Apple AAPL, and International Business Machines IBM continued to generate double-digit returns. After surging during most of the 1990s, the tech bubble finally popped in 2000, followed by a brief recession in 2001. Because valuations were still inflated leading up to the recession, the communications and technology sectors suffered the deepest losses.

Does the prospect of a looming recession mean an overhaul of portfolios? No. In fact, making wholesale shifts in portfolio holdings is usually a bad idea. But studying how the market has historically performed can help you set expectations for how your holdings might react if and when the economy weakens.

 

Amy C. Arnott, CFA, is a portfolio strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. The author owns shares in one or more securities mentioned in this article. Find out about Morningstar’s editorial policies. This article is general information and does not consider the circumstances of any investor. It has been edited somewhat from the original US version for an Australian audience.

Register for a free trial of Morningstar Premium on the link below, including the portfolio management service, Sharesight.


Try Morningstar Premium for free


 

  •   8 November 2023
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Seven lessons on how investors should prepare for a recession

Why it's a frothy market but not a bubble

Is your portfolio too heavy on technology stocks?

banner

Most viewed in recent weeks

Australian stocks will crush housing over the next decade, 2025 edition

Two years ago, I wrote an article suggesting that the odds favoured ASX shares easily outperforming residential property over the next decade. Here’s an update on where things stand today.

Building a lazy ETF portfolio in 2026

What are the best ways to build a simple portfolio from scratch? I’ve addressed this issue before but think it’s worth revisiting given markets and the world have since changed, throwing up new challenges and things to consider.

Get set for a bumpy 2026

At this time last year, I forecast that 2025 would likely be a positive year given strong economic prospects and disinflation. The outlook for this year is less clear cut and here is what investors should do.

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Property versus shares - a practical guide for investors

I’ve been comparing property and shares for decades and while both have their place, the differences are stark. When tax, costs, and liquidity are weighed, property looks less compelling than its reputation suggests.

10 fearless forecasts for 2026

The predictions include dividends will outstrip growth as a source of Australian equity returns, US market performance will be underwhelming, while US government bonds will beat gold.

Latest Updates

Economy

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

Superannuation

No, Division 296 does not tax franking credits twice

Claims that Division 296 double-taxes franking credits misunderstand imputation: franking credits are SMSF income, not company tax, and ensure earnings are taxed once at the correct rate.

Investment strategies

Who will get left holding the banks?

For the first time in decades, the Big 4 banks have real competition in home loans. Macquarie is quickly gain market share, which threatens both the earnings and dividends of the major banks in the years ahead.

Investment strategies

AI economic scenarios: revolutionary growth, or recessionary bubble?

Investor focus is turning increasingly to AI-related risks: is it a bubble about to burst, tipping the US into recession? Or is it the onset of a third industrial revolution? And what would either scenario mean for markets?

Investment strategies

The long-term case for compounders

Cyclical stocks surge in upswings but falter in downturns. Compounders - reliable, scalable, resilient businesses - offer smoother, superior returns over the full investment cycle for patient investors.

Property

AREITs are not as passive as you may think

A-REITs are often viewed as passive rental vehicles, but today’s index tells a different story. Development and funds management now dominate earnings, materially increasing volatility and risk for the sector.

Australia’s quiet dairy boom — and the investment opportunity

Dairy farming offers real asset exposure, steady income and long-term growth, yet remains overlooked by investors seeking diversification beyond traditional asset classes.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.