If Recession Comes, Which 2 Sectors Will Be Hit Hardest (Based on Past)

| December 3, 2018

Dear Reader, since 1980 the world has seen 4 recessions as declared by NBER (National Bureau of Economic Research). The average duration of each recession was 12.5 months.


You know last recession was from December 2007 to June 2009. This was the longest among the 4 recessions from 1980.

Above facts are not to scare you. But they will remind you that recessions are unavoidable and you should always be prepared for the next one. Now let us come to the bigger question. If a recession comes anyways, which sectors will be the most affected and which sectors will be the least affected? In an ideal world, no genius can predict the future with certainty. But the closest one can get is to analyze the recently over recession.

In this post, you will see which 2 sectors of S&P 500 saw the steepest fall (i.e, worst performers). You will also see which 2 sectors were the best performers.

Before getting into the sector details, you have to see how S&500 overall index performed. This will help you to visualize the impact of the recession on the index as a whole.

You may already know that there are 10 sectors under S&P 500. Hence, the above chart is an overall representation of how all the sectors performed.

During the start of the recession (3rd December 2007), the index was at 1472.42 points and during the end (30 June 2009) it fell to 919.32 points. In other words, the fall in S&P composite index was as high as 37%.

Now, let us get into our main subject. Which among the 10 sectors were the best and worst performers? Though we can consider a lot of metrics to find those, the simplest and the most reasonable metric would be the sector wise price index.

Below is the chart showing all the 10 sectors of S&P 500 and the sector wise index details during recession. The first column shows the values of the sector indexes at the start of the recession, the second column shows the values at the end of the recession. The third column shows the fall in index points from start of the recession to the end. The final and fourth column shows the fall in percentage. Now it will be quite obvious for you that the sector with the highest percentage was the worst performer and that with the lowest percentage fall was the best performer.

The top 2 worst performers are shown in yellow and the best 2 performers are shown in light blue.

Sectors Dec.2007 Jun.2009 Fall Percentage Fall
Financials 411.08 160.76 250.32 60.89
Industrials 353.54 191.29 162.25 45.89
Materials 256.57 154.48 102.09 39.79
Telecommunication 163.51 104.18 59.33 36.29
Utilities 217.55 141.9 75.65 34.77
Energy 563.83 373.84 189.99 33.7
Consumer Discretionary 271.98 182.15 89.83 33.03
Information Technology 402.02 287.63 114.39 28.45
Health care 420.11 306.45 113.66 27.05
Consumer Staples 302.02 238.18 63.84 21.14

Worst Performed Sector 1: Financials (But Why?)

Financials fell from 411.08 levels at the start of the recession to 160.76 levels at the end. This was the sector that was hit hardest during the previous recession. To see the impact on this sector alone, you have to look at the below chart showing financial sector index only.

Why such a steep fall in the financial sector?

Banks, investment firms, real estate firms, etc, come under financial sector. Anyone who knows the financial crisis of 2007 will not be surprised to see the huge fall in this sector. As you know, mortgage crisis was one of the prime reasons for the financial crisis. (Government had to adopt several important measures for recovery including huge stimulus packages to banks.)

Worst Performed Sector 2: Industrials (Which One Important Factor Makes Them Vulnerable?)

The industrial sector comprises mainly manufacturers and suppliers.
The index of this sector fell from 353.54 points in December 2007 to 191.29 points in June 2009. Below is the chart showing S&P 500 Industrials Index.

Which one important factor created a downward spiral in the manufacturing sector?

The recession of 2007-09 witnessed a huge drop in jobs in manufacturing sector. Some figures say that the loss was as high as 2 million. But as an investor, what you can infer from this? The simplest conclusion you can draw is that companies were cutting their operating costs.

Now you have to think from company’s perspective. How do companies cut costs? Is job cut the only means? Obviously no. They will adopt several measures like reducing production, reducing import of goods manufactured by suppliers, etc. Supplier to any manufacturer will either be a manufacturer or a distributor. Hence, what one manufacturer does to cut cost will affect the other manufacturer (supplier). This is a vicious cycle and is arguably the most important factor in causing a downward spiral.

Now that you have seen the 2 most affected sectors, you should be cautious with these sectors in case there is a recession. While for long term investors this could be an opportunity, if you are one with a little patience, you should think deep before investing.

Now you will see the two sectors which fell least while the entire stock market was under stress. Here are your 2 best performers during 2007 recession.

Best Performed Sector 1: Consumer Staples

According to GICS (Global Industry Classification Standard), consumer staples sector includes industries that produce household products, personal care products (like shampoo and toothpaste), retail food products, etc. In other words, the products we are talking about are those which you use on a daily basis.

Consumer staples sector saw the least fall during the recession. Yes, believe it or not, the fall was only 21.14% from 302.02 points during the recession start to 238.18 points at the recession close. Below is the chart showing the price index movement of this sector.

2 Reasons Why Consumer Staples Will Remain Recession Proof

There are a couple of very good reasons why consumer staples sector is resilient even in tough times. First reason is that the products produced in this sector are so very basic and you cannot live without them. The second important reason is that the products are moderately priced. In short, the products we are talking about are low priced essential items. What more can you expect from this sector?

Best Performed Sector 2: Health care

Heath care S&P index fell just 27.05% between the start and end of the recession. You can realize the significance of this number if you compare with the steep fall of 60.89% in the financial sector.

Below is the chart showing S&P 500 health care index.

Why health care sector was least impacted?

Assume that you plan your monthly budget during tough times. You will be inclined to cut on travel and restaurant visits. But seldom you will try to cut on doctor visits if someone in your family gets sick. This is the simplest explanation to why health care sector is not much affected by the recession.

What is your final takeaway?

Learning from the past is a good way to prepare for the future. You just saw which sectors were hit hardest and which ones were the least affected. You also saw the fundamental reasons why sectors like health care and consumer staples are recession proof and why sectors like manufacturing tend to get most affected. Hopefully, this post will help you in your future investment decisions, especially at times when recession is likely.

But past performance alone is not a sole indicator of the future. Many new factors can come in the way that could hurt or help sectors differently compared to the past. Share your thoughts in the comments section below.