After Tuesday’s sharp reversal in equities that brought major indexes back to where they started the week, nervousness is continuing to build about the market’s health, and rightly so. Major support at 2,040 on the S&P has already been tested twice since February, and triple bottoms are very rare.
Strategies for how to deal with a correction, or even a potential crash, range from establishing short positions to defensive dividend mega-caps, bottom picking individual sectors or just going to cash and waiting. Each of these strategies has serious disadvantages. Shorts can get squeezed if the trend continues. Defensive positions will preserve capital, but will not net you any gains if the worst does occur. Bottom picking is dangerous if timed incorrectly. Going to cash exposes you to inflation and definitely will not get you any gains.
But there are recession stocks out there that are either tied to industries that tend to see increased business during a downturn or are tied to commodities with relatively inelastic demand curves. Here are four of them.
A recession hits, your portfolio is down and you can no longer shop at Whole Foods for gourmet tuna and Abercrombie & Fitch for your designer clothing. To your chagrin, you head over to Dollar Tree to see how much stuff you can buy for $20, and it turns out to be a lot. Dollar Tree Inc. (NASDAQ: DLTR) shares barely reacted to the 2008 financial crisis, and it is likely they will not be too battered if something like that happens again.
In fact, Dollar Tree’s top and bottom lines were pretty much untouched by the chaos. (See page 17.) Dollar Tree has the advantages of being a defensive stock without it being a typical mega-cap unable to see much growth.
Same concept here. Dollar General Corp. (NYSE: DG) is larger than Dollar Tree, and it does have a small dividend. Both 2008 and 2009 were spectacular years for Dollar General. (See page 27.) The company is near its highs along with the rest of the market, but will not fall nearly as hard if the market reverses, and may even continue higher on the increased business that usually comes with financial stress.