Many S&P 500 investors are convinced a recession is on the way. And if it is, you’ll want to know which stocks to avoid.
The stocks that routinely suffer most during recessions are somewhat counterintuitive. Five stocks in the S&P 500, including industrial company Boeing (BA) and energy firms Baker Hughes (BKR) and Halliburton (HAL), underperformed the S&P 500 in each of the past five recessions, says an Investor’s Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. All lagged the S&P 500 in each of the five recessions since 1980.
The idea that some utilities and energy may underperform in a recession is a wake-up call. These are the exact sectors many S&P 500 investors are rushing into now as the odds of recession grow. “Recession risks are rising for next year, especially if high prices get entrenched in the economy,” said Jeffrey Roach, chief economist at LPL Financial.
Why Recession Is On The Table For S&P 500 Investors
Investors typically expect a recession every decade. And it’s only been two years since the Covid-19 outbreak sparked one in 2020. Why the recession worries now?
Skyrocketing inflation, especially for fuel and housing, is crimping consumer spending.
The Federal Reserve vows to aggressively cool the economy. Investors are braced for short-term interest rates to jump by at least 2.5 percentage points by year’s end, says The Economist. And when rates rise that fast, recession usually follows. The Economist found that in six out of the seven cycles that interest rates rose this fast a recession appeared less than two years later.
“The Fed wants demand destruction, full stop. It is their (only) policy hammer for the inflation nail. This is bad for asset prices,” said Scott Ladner, Chief Investment Officer at Horizon Investments.
Investors usually do one thing in recessions: They sell S&P 500 stocks. But not as much as you might think. There have been 11 recessions in the U.S. since the one that started in 1953. And the S&P 500 dropped an average 2.1% during them. Sure, it can be worse. The S&P 500 plunged 11.2% in the last recession that started in 2020. And it fell nearly 38% in the 2007-starting recession.
But some S&P 500 stocks are especially vulnerable during recessions.
The S&P 500 Stock You Really Don’t Want To Own In A Recession: Boeing
If there’s an S&P 500 stock that might surprise investors with its demonstrated poor track record in recent recessions, it’s aircraft maker Boeing.
Shares of the company that’s part of a near oligopoly for commercial airplanes is a dud in recessions. Shares have dropped an average 40.1% in the past five recessions. That’s the worst showing of any S&P 500 stock in that time. It’s surprising, too, as Boeing typically carries a big backlog of plane orders.
But apparently some of that demand evaporates in recessions, along with demand for the stock. Shares of Boeing plunged 56% in the recession that started in 2020, 43% in the one that began in 2007 and 47% in the 2001 recession. And that’s a real danger for investors piling who have already pushed it down 37% this year.
Avoid Energy And Utilities In A Recession?
Investors are piling into energy and utilities stocks this year to profit from inflation. But there’s just one problem: Many of these stocks suffer mightily in recessions.
Take Halliburton. It’s a popular stock this year, up roughly 77% as it’s supplying equipment needed to unearth high-priced fossil fuels. But it’s been a horrible stock to own in previous recessions. Halliburton shares dropped an average of more than 40% in the past five recessions. And it can be worse, still. Shares of Halliburton lost more than half their value in the 2020 Covid recession.
And it’s a similar story with Baker Hughes, also a supplier of equipment to energy firms. Its shares dropped more than 30%, on average, in the last five recessions.
This could be the big revelation to investors who are piling into energy and utilities stocks. It’s widely thought they’re good bets during inflation. The Energy Select Sector SPDR Fund (XLE) is up 59% during the year so far. And the Utilities Select Sector SPDR Fund (XLU) is only down 0.2%. That’s amazing performance when the S&P 500 is off roughly 18% on the year.
But if there’s a recession, all bets are off. Energy stocks lost more than 20% of their value in the past three recessions.
Don’t think many investors are expecting that.
Worst S&P 500 Stocks During Recessions
They lagged the market in each of the past five recessions
|Company||Symbol||Stock year-to-date % ch.||Average % stock ch. last five recessions||Sector|
|American Electric Power||(AEP)||10.4||-13.5||Utilities|
Sources: IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
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