30:["$","$L31",null,{"category":"$32","relatedArticles":[{"id":"cG9zdDoyNzAxNDM=","databaseId":270143,"postId":270143,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1449,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQ4OQ==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19489,"categoryId":19489,"link":"https://smartasset.com/portfolio-management/articles","name":"Portfolio Management","postCount":{"pageInfo":{"offsetPagination":{"total":157,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"portfolio-management","ancestors":{"nodes":[{"name":"Investing","slug":"investing","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Investing","id":"dGVybTo1MzE4","slug":"investing","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$33","date":"2024-12-03T19:18:02","excerpt":"

It’s true that investors often look for recession-proof stocks to protect their portfolios during economic downturns and bank stocks are sometimes considered recession-proof. But, while some sectors are more resilient than others, you should note that no stock is entirely recession-proof. Bank stocks, in particular, can be vulnerable with increased loan defaults, reduced consumer spending […]

\n","featuredImage":{"id":"cG9zdDoyNzAxNDY=","databaseId":270146,"altText":"An investor researching whether bank stocks are recession-proof.","date":"2024-12-03T19:12:35","fileSize":197830,"mimeType":"image/jpeg","modified":"2024-12-03T19:16:50","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/12/iStock-1319189527.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-12-3","readable":"December 3, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. 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","

A financial advisor can help you analyze and manage recession-resistant investments for your portfolio.

","

What Is a Recession?

","

A recession is a period of significant economic decline, typically characterized by two consecutive quarters of negative GDP growth, high unemployment, reduced consumer spending and lower industrial production. During recessions, businesses often see declining profits, leading to layoffs, reduced consumer confidence and slowed economic growth.

","

Recessions can stem from different factors, including economic shocks, rising interest rates or global events that disrupt trade and production. They impact all aspects of the economy, including the stock market. For investors, recessions often mean increased volatility and reduced stock prices, as companies struggle with lower demand and consumers cut back on spending.

","

Many sectors, such as retail, travel and luxury goods, may be particularly vulnerable. However, some defensive sectors, like utilities, healthcare and consumer staples, tend to be more stable, as they provide essential goods and services that remain in demand regardless of economic conditions.

","

Recessions and Bank Stocks

","

Bank stocks have historically been sensitive to economic downturns, as recessions can create significant challenges for financial institutions. During recessions, consumers and businesses may struggle to meet their loan obligations, leading to higher rates of loan defaults, which directly impact banks’ profitability.

","

Additionally, central banks often reduce interest rates to stimulate economic growth during recessions. While this makes borrowing cheaper for consumers, it can also reduce the interest income that banks earn on loans, further squeezing profits.

","

During the 2008 financial crisis, for example, banks suffered considerable losses due to high levels of mortgage defaults, and the financial sector was one of the hardest hit. While banks have since strengthened their risk management practices, they remain susceptible to economic downturns.

","

That said, large, well-capitalized banks with diversified revenue streams, such as those that offer investment and wealth management services, may be better positioned to weather recessions compared to smaller banks that rely heavily on traditional lending.

","

Recession-Proof Alternatives

","

","

While bank stocks may face challenges during a recession, there are other market sectors that are often viewed as more recession-resistant. Here are three sectors that provide essential goods and services, which generally remain in demand even during economic downturns.

","

Consumer Staples

","

Consumer staples, which include companies that produce food, beverages, personal care products and household items, are generally considered recession-resistant. These goods are necessities and demand remains stable, regardless of economic conditions.

","

For example, companies like Procter & Gamble and Coca-Cola often see steady demand as consumers continue to buy essential products like soap, toothpaste and groceries. While consumer staples may not experience high growth during a recession, they tend to offer stability, making them a popular choice for conservative investors seeking resilience in downturns.

","

Utilities

","

Utilities are another sector that tends to be more resilient during recessions. Utility companies provide essential services, such as electricity, water and natural gas, which remain in demand regardless of the economy’s state.

","

Stocks in this sector, like Duke Energy or NextEra Energy, can offer steady returns and dividends, as utility companies typically operate under regulated pricing structures that ensure predictable income. Utility stocks are attractive to investors seeking reliable income and lower volatility during recessions.

","

Healthcare

","

Healthcare is often viewed as a defensive sector because of the constant demand for medical services, pharmaceuticals and healthcare products. During a recession, people continue to require medical care and prescription medications, making companies in the healthcare sector more stable.

","

Investing in large healthcare companies like Johnson & Johnson and Pfizer, as well as health insurance providers, can offer stability during economic downturns. While healthcare stocks are not entirely immune to market fluctuations, their essential nature often makes them more resilient during recessionary periods.

","

Frequently Asked Questions

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Are Bank Stocks Safe to Hold During a Recession?

","

Bank stocks may face challenges during recessions due to increased loan defaults and lower interest income. However, large, diversified banks with strong capital reserves may be more resilient. It is essential for investors to assess each bank’s financial health and revenue diversification before investing.

","

What Types of Stocks Are Considered Recession-Proof?

","

Sectors that provide essential goods and services, such as utilities, healthcare and consumer staples, are often considered more recession-resistant. These industries tend to have steady demand regardless of economic conditions, making their stocks more stable during downturns.

","

Why Do Central Banks Lower Interest Rates During Recessions?

","

Central banks often reduce interest rates to stimulate borrowing and spending, which can help boost economic growth during a recession. Lower rates make it cheaper for consumers and businesses to borrow, aiming to increase economic activity.

","

Bottom Line

","

","

While bank stocks can offer growth, they are not entirely recession-proof, and can face significant risks during economic downturns. Investors looking for recession-resistant investments may find more stability in sectors like consumer staples, utilities and healthcare. Diversifying across these can help you build a more robust portfolio capable of withstanding economic uncertainties.

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Investment planning Tips

","$40","

Photo credit: ©iStock.com/demaerre, ©iStock.com/PeopleImages, ©iStock.com/nathaphat

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Gross profit margin is a ratio that measures the percentage of revenue left after subtracting production costs. By indicating the profitability of a company’s core business operations, gross profit margin can help investors evaluate how effectively a business manages production costs in relation to its sales. Gross profit margin offers insight into a company’s profitability […]

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","

A financial advisor can help you evaluate and select investments for your portfolio. Speak with your financial advisor matches today.

","

What Is Gross Profit Margin?

","

Gross profit margin represents the percentage of a company’s revenue that remains after accounting for the cost of goods sold (COGS). These expenses may directly be related to producing goods or services, such as materials and labor, but excludes indirect costs like marketing or administrative expenses.

","

A higher gross profit margin may suggest effective management of production costs relative to sales. Conversely, higher production costs result in a lower margin, affecting overall profitability.

","

How Does the Gross Profit Margin Work?

","

Gross profit margin reveals how well a business turns revenue into profit before operating expenses are considered. It shows the relationship between revenue and production costs, helping investors assess a company’s cost efficiency.

","

Companies with high gross profit margins are usually better at controlling production costs, which can indicate a competitive advantage. Strong margins may point to cost efficiency or operational advantages over competitors.

","

Investors use gross profit margin to compare companies within the same sector and to track a company’s profitability over time. A declining gross profit margin might suggest rising costs or pricing pressures, while an increasing margin could indicate improved cost control or increased demand for the company’s products.

","

Gross Profit Margin: Formula and Calculation

","

Using the following formula, you can easily calculate gross profit margin:

","

Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue x 100

","

For example, if a company has $600,000 in revenue and $400,000 in COGS, its gross profit margin would be:

","

Gross Profit Margin = (($600,000 – $400,000) / $600,000) x 100 = 33.3%

","

This means 33.3% of the company’s revenue remains after covering production costs.

","

Gross Profit Margin vs. Net Profit Margin

","

","

Gross profit margin and net profit margin measure different aspects of a company’s financial performance, though both are useful profitability metrics.

","

Gross profit margin only considers revenue and COGS, providing insight into core production efficiency.

","

Net profit margin, on the other hand, accounts for all expenses, including taxes, interest and operating costs, offering a more comprehensive view of overall profitability.

","

Why Gross Profit Margin Is Important

","

Gross profit margin offers a window into how efficiently a company manages production and controls its costs.

","

As noted earlier, a higher gross profit margin suggests that a company is effectively managing production costs while keeping sales robust, often pointing to strong pricing power or efficient cost control. This financial metric can also help you assess how well a company can withstand pricing pressures, as a higher margin may allow flexibility in adjusting prices or absorbing cost increases.

","

Tracking gross profit margin over time can reveal trends in a company’s cost management and production efficiency. An improving margin might suggest cost-cutting measures or successful pricing strategies, while a declining margin could indicate rising production costs or weakened pricing power.

","

Additionally, by comparing gross profit margins within an industry, you can identify companies with a competitive advantage.

","

Limitations of Gross Profit Margin

","

While gross profit margin is a helpful metric, it has a few limitations to keep in mind. This metric only accounts for direct production costs and excludes operating expenses, taxes and interest. So it doesn’t provide a complete picture of profitability.

","

Gross profit margin can also vary widely across industries, so this metric is useful for comparisons within the same sector rather than across different industries.

","

Finally, changes in gross profit margin may not always reflect operational efficiency, as they could result from external factors like fluctuating material costs or supplier price changes.

","

Frequently Asked Questions

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What Is a Good Gross Profit Margin?

","

A “good” gross profit margin varies by industry. Generally, higher margins are preferable, as they indicate efficient cost management. However, what’s considered good depends on industry norms and a company’s specific business model.

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Is Gross Profit Margin the Same as Net Profit Margin?

","

No, gross profit margin only considers revenue and production costs, while net profit margin accounts for all expenses, offering a more comprehensive view of overall profitability.

","

Bottom Line

","

","

Gross profit margin is a useful financial metric for understanding a company’s production efficiency and cost control. However, investors and businesses should use gross profit margin alongside other financial metrics to gain a more complete picture of profitability and financial health. By analyzing gross profit margin, investors can gain insights into how effectively a company manages direct costs and sales, making it a valuable tool for evaluating and comparing potential investments.

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Tips for Analyzing Stocks

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Photo credit: ©iStock.com/SOMKID THONGDEE, ©iStock.com/Ratana21, ©iStock.com/Bevan Goldswain

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Investors looking for recession-proof stocks often focus on companies that tend to perform steadily even during economic downturns. These stocks are typically found in industries that provide essential goods or services, such as utilities, healthcare and consumer staples. Businesses in these sectors usually experience consistent demand, regardless of market conditions, which can help them maintain stable earnings. Additionally, companies with strong balance sheets, low debt and a history of dividend payments are often seen as reliable choices for weathering economic challenges.

","

If you want to build a recession-proof portfolio, a financial advisor can work with you to help analyze investments and manage them.

","

What Makes a Stock Recession-Proof?

","

While no stock is ever completely immune to the effects of a recession, certain qualities can help a company weather economic downturns more effectively. Here are five common characteristics that can offer a level of stability during uncertain times.

","

Low Cyclical Sensitivity

","

Cyclical stocks are highly sensitive to the broader economy and tend to experience sharp declines during recessions. In contrast, recession-proof stocks are often found in industries with low cyclical sensitivity. These industries do not depend heavily on economic growth to drive revenues. Companies in these sectors can maintain more consistent sales and profits because their products and services are considered essential.

","

For example, waste management services or telecommunication companies often see stable demand, as these are not tied to the ups and downs of the business cycle.

","

Strong Balance Sheet

","

A company with a strong balance sheet is better equipped to handle economic challenges. This includes having ample cash reserves and a healthy ratio of assets to liabilities. Companies in this position are more likely to continue operations smoothly, even when revenues dip, as they have the financial flexibility to cover expenses without relying on external funding.

","

Low Debt

","

Firms with low debt levels are generally less vulnerable to the increased financial pressure that often accompanies recessions. With lower debt obligations, these companies can avoid the burden of high-interest payments, which can become more difficult to manage when income slows. Reduced debt also allows them to be more agile in adjusting their operations and costs.

","

Dividend Payout History

","

Companies with a consistent history of paying dividends tend to be financially stable and committed to returning value to shareholders. A steady dividend track record, particularly through past recessions, suggests the company can maintain cash flow and profitability even during tough times, making it more attractive to investors seeking income during downturns.

","

Diversified Revenue Streams

","

A company with diversified revenue streams is often better equipped to withstand a recession. By generating income from multiple areas—whether through different product offerings or operations in various geographic markets—a business can reduce its reliance on any one source of revenue.

","

For example, a global consumer goods company that sells both household cleaners and food products may see slower sales in one category, while stronger demand in another helps balance the impact. This diversification helps smooth out revenue fluctuations, leading to more stable stock performance during economic downturns.

","

Which Industries Perform Best in Recessions?

","

","

During economic downturns, not all sectors of the economy are affected equally. Certain industries are better suited to withstand recessions because they provide goods and services that remain in demand, regardless of economic conditions. These four sectors could offer stability due to the consistent need for essential products and services.

","

Consumer Staples

","

Companies in the consumer staples sector produce goods that people use daily, such as food, beverages and household items. Demand for these products remains consistent regardless of economic conditions, as consumers prioritize essential items. Major players in this sector, like grocery stores and large food manufacturers, tend to experience steady revenues, making them attractive to investors seeking stability during a recession.

","

Healthcare

","

The healthcare industry is another area that typically weathers recessions well. Whether it’s pharmaceuticals, medical devices or healthcare services, people continue to need medical care even during economic downturns. The ongoing demand for treatments, medications, and hospital services makes healthcare stocks a common choice for recession-proof portfolios. Additionally, many companies in this sector often receive government funding, which can further stabilize their revenues.

","

Utilities

","

Utilities, including electricity, water and natural gas providers, are important services that individuals and businesses continue to rely on no matter the state of the economy. Since these services are non-discretionary, utility companies often maintain steady cash flow during economic downturns. Their consistent demand and ability to pass on costs to consumers through regulated price increases make utilities a historically reliable investment in uncertain times.

","

Discount Retailers

","

Retailers that sell discounted goods, such as dollar stores or budget supermarkets, often see increased sales during recessions as consumers look for ways to save money. Companies in this sector benefit from the shift in spending behavior, as people become more price-conscious and seek out cheaper alternatives for their everyday purchases.

","

Which Industries Struggle the Most in a Recession?

","

Certain companies and industries tend to struggle during recessions because they rely on discretionary spending or are closely tied to economic cycles. Here are five general examples:

","

Luxury goods: High-end fashion, jewelry and premium automobiles often see reduced demand as consumers cut back on non-essential purchases.
Hospitality and travel: Airlines, hotels and tourism-related services typically experience sharp declines as people postpone vacations and business travel.
Retailers of non-essential goods: Companies selling items like electronics, home furnishings and other discretionary products face revenue drops as consumers reduce spending on non-essentials.
Cyclical industries: Construction and manufacturing are often hit hard, as businesses delay capital expenditures and new projects during economic uncertainty.
Media and entertainment: Industries reliant on advertising dollars, such as media and entertainment, can struggle as companies cut marketing budgets to conserve resources.

","

Bottom Line

","

","

When considering stocks during a recession, it’s useful to focus on industries and companies that are able to maintain steady demand regardless of economic conditions. Sectors like healthcare, utilities and consumer staples provide services and products that people continue to need, offering greater stability in tough times. On the other hand, industries dependent on discretionary spending, such as luxury goods, travel and entertainment, often struggle as consumers and businesses cut back on non-essential expenses.

","

Investment Planning Tips

","$66","

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Building a recession-proof stock portfolio can help investors weather economic downturns with greater stability and confidence. While no portfolio can be entirely recession-proof, selecting resilient stocks from defensive sectors and diversifying your investments can help you mitigate the impact of a market downturn. A financial advisor can work with you to diversify your portfolio to […]

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","

How a Recession Can Impact the Market and Your Portfolio

","

Investing during a recession differs significantly from investing in a thriving market. In a normal market, economic growth typically boosts consumer spending, business expansion and corporate earnings, which in turn supports rising stock prices.

","

However, a recession generally brings a slowdown in economic activity, reduced consumer spending and lower business profits. As companies cut costs, freeze hiring and scale back operations, stock prices can fall across the board and volatility increases.

","

For investors, a recession can create losses in their portfolio, particularly for cyclical stocks in sectors like retail, travel and luxury goods, which are more sensitive to economic conditions. Many cyclical stocks tend to underperform during recessions as consumers cut back on non-essential purchases and businesses tighten budgets.

","

On the other hand, defensive stocks – those in sectors like healthcare, utilities and consumer staples – can hold their value better during economic downturns, as these sectors provide essential goods and services that remain in demand regardless of economic conditions.

","

Managing a portfolio in a recession means adapting to the increased risks and focusing on assets that provide stability and defensive growth. For many investors, this may involve shifting away from high-growth, high-volatility sectors and increasing holdings in stocks and assets that have shown resilience in past recessions.

","

The Importance of Diversification

","

Diversification is a key strategy for protecting a portfolio during a recession. By spreading investments across different asset classes and sectors, investors can reduce the risk of heavy losses if one area of the market suffers. A diversified portfolio includes a mix of stocks, bonds and other assets that may not move in the same direction during economic shifts.

","

During recessions, diversification becomes especially important because different asset classes respond to economic downturns in unique ways. For example, while stocks may decline, certain bonds or defensive sector stocks may continue to perform well. This helps to create balance and reduce the likelihood of substantial losses.

","

Diversifying across industries, asset classes and geographies can further increase the portfolio’s resilience, helping to protect your investments through economic ups and downs.

","

How to Build a Recession-Proof Stock Portfolio

","

","

No stock portfolio is completely recession-proof, but you can still build a diversified stock portfolio aimed at withstanding economic downturns. A diversification strategy would include different asset classes, including defensive and growth-oriented stocks.

","

To start building a recession-resistant portfolio, prioritize companies with strong fundamentals, stable earnings and low debt levels. Companies that provide high dividends may also offer added stability, as dividend payments provide regular income and can help offset declines in stock prices.

","

Companies with a history of solid performance during past recessions may be worth considering, too, as they have demonstrated resilience in difficult economic conditions.

","

Maintaining a balance between defensive and growth-oriented stocks is also important. Defensive stocks provide stability, while growth stocks, particularly those with strong market positions and sustainable demand, may still offer returns even in downturns. Here are some investments to consider when creating a portfolio.

","

Defensive Sectors to Consider for a Recession

","

When building a recession-resistant portfolio, focusing on historically resilient sectors can provide added stability. Here are some sectors to consider, along with examples of top stocks:

","$7e","

Other Investments to Consider

","

In addition to stocks, there are other types of investments that can help create a recession-resistant portfolio. Here are some alternative investments to consider:

","$7f","

Bottom Line

","

","

Building a recession-proof stock portfolio involves selecting investments that are more likely to hold their value during economic downturns. By focusing on defensive sectors, diversifying your holdings and considering alternative investments, investors can create a more resilient portfolio that balances stability with growth potential. While no portfolio can be entirely immune to a recession, taking these steps can help minimize risk and better protect your wealth through periods of economic uncertainty.

","

Investment Planning Tips

","$80","

Photo credit: iStock.com/filadendron, iStock.com/filadendron, iStock.com/

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