Investing in a downturn can be challenging. Which stocks are likely to hold up during a recession? Here’s what to consider.

Recent job data reveals a strong labor market with 339,000 jobs added—far surpassing the 190,000 expected. After so much talk about a recession, it's easy to feel fatigued by the constant speculation, making it seem like an endless drama.

While recession fears may prove unfounded, it's also possible for a mild recession to occur, potentially benefiting the markets. Michael Yoshikami, CEO of Destination Wealth Management, shared on CNBC that a recession might actually mitigate a significant market decline later this year.

“This may seem counterintuitive, but if the U.S. avoids prolonged economic stagnation, a mild recession could be viewed negatively,” Yoshikami noted on CNBC.

This perspective isn’t as strange as it sounds. It's worth remembering that no one desires a recession; they bring hardship to families and communities. However, from an investment standpoint, a modest slowdown could prompt the Federal Reserve to slow rate increases, which might benefit certain stocks and bond prices. An ongoing series of rate hikes, while necessary to combat inflation, could negatively impact the markets.

Greg McBride, Chief Financial Analyst at Bankrate.com, states, “A recession typically boosts bond prices as investors seek safer options, but stock prices usually suffer.” He explains that a contracting economy tends to reduce corporate profits, leading to lower stock valuations. Yet, for those with a long-term view, investing in stocks during a downturn can yield significant returns over time.

“It’s fairly simple,” adds Michael Halpern, president of Westmore Capital Advisors. “In a recession, economic activity slows down.” If interest rates also decline, companies can borrow at lower costs, which helps stabilize expenses. Provided the recession doesn’t drastically affect consumer purchasing power, profitability may improve, especially if companies maintain their prices.

Stocks Likely to Perform Well

Halpern notes that during a brief recession, less-cyclical industries often fare better. “High-quality tech firms—think Google, Amazon, Apple, and Microsoft—tend to perform better in economic slowdowns due to their consistent earnings growth.”

Additionally, consumer staples and healthcare sectors usually experience less volatility during tough economic times. People prioritize essentials like food and healthcare over discretionary expenditures, making these stocks more resilient.

“Companies like Amazon and Netflix, previously valued at high earnings multiples, may see their future earnings diminish in appeal. A one-year Treasury yielding 5% becomes more attractive than a stock with a 40 P/E ratio,” our source explains. “If earnings growth isn’t exceptionally rapid, comparable valuations become challenging. A modest recession can reduce the discount rate, enhancing the value of future earnings.”