We may not know exactly when the next market crash is coming, but we know that it is a certainty that will occur at some point. Accepting market cycles is part of the investment, but preparing your portfolio for crises can be an important part of protecting your earnings. If your allocation is too risky, you may want to consider adding stocks that perform well during recessions and market declines. This will not normally provide spectacular growth during bull markets, but it is unlikely to decline as strongly as bulls.
Utility stability
Utilities is one of the classic defensive sectors, known for its good performance during recessions. When people reign over spending on housing, expensive items, vacations and meals, they are less likely to turn off electricity, water or heating in their homes. As a result, utility providers have relatively stable businesses that tend to experience slow growth and limited interruptions in economic cycles.
Eversource Energy (NYSE: ES) provides natural gas, electricity and water utilities to 4.3 million customers in Connecticut, Massachusetts and New Hampshire. The stock’s future P / E ratio of 21.9 and the company’s EBITDA value of 14.1 are low enough in the current market to provide a relative cushion if valuations fall in a market crash. Eversource also pays a 2% dividend yield to provide returns while you face a crisis. Risk-averse investors will also appreciate the fact that Eversource carries relatively low debt between utilities, with a debt-to-equity ratio of just 1.17 and an interest coverage rate of 3.88.
Image source: Getty Images.
Consumer goods
In difficult times, consumers still buy groceries, household items and personal care products. Companies that have popular brands of basic products tend to be less volatile during recessions and market declines. They will never be great sources of growth, but they are stable.
Procter & Gamble (NYSE: PG) offers consumer goods packaged in the categories of home care, cleaning, beauty, hygiene and personal care. The company’s portfolio includes several well-known brands, including Bounty, Crest, Dawn, Downy, Febreeze, Gain, Gillette, Head & Shoulders, Oral-B, Olay, Pampers, Pantene, Tide and Vicks. A broad portfolio of commodities sold in 70 countries will hold up well in any recession, so Procter & Gamble’s fundamentals will remain stable.
This is not the type of stock that will attract bullish valuation multiples, so there is less room to fall when the market crashes. P&G trades at a modest future P / E ratio of 22.9 and EV / EBITDA of 16.2, so that stock prices are anchored by the company’s profits. The stock also pays a healthy dividend yield of 2.5% over a sustainable payment ratio of 59%. It is a decent return for when the market sinks.
Discount stores have more demand during recessions
Consumers become more demanding during income insecurity. Total retail spending generally declines during recessions, and budget-conscious households begin to bargain. Retailers who can supply basic products at an attractive price, in fact, experience an increasing demand as people substitute for more expensive items.
Dollar Tree (NASDAQ: DLTR) operates more than 15,000 dollar stores in 48 U.S. states and Canada. While the S&P 500 it was falling more than 40% from 2007 until the beginning of 2009, Dollar Tree shares were practically where they started. General commodity commodities with the lowest price bring obvious value to consumers. If the next market crash is caused by weak economic conditions in the US, Dollar Tree’s financial performance is likely to remain stable.
Dollar Tree’s shares trade at a future P / E ratio of 17.2 and EV / EBITDA of 16. Investors looking to limit the risk in their stock portfolios are likely to increase their holdings in those shares, which should limit losses during the next market crash.