Taking Stock

How will the economy affect your investments this year?
Magazine Contributor
3 min read

This story appears in the April 2008 issue of Entrepreneur. Subscribe »

As the economy slowed in recent months, large-growth stocks came to the top of the investment column for the first time in several years. That's what you'd expect since those stocks have historically fared better in recession times. But a couple of the individual sectors you would also expect to benefit from economic turmoil have insolently remained laggards. What gives?

Take health-care stocks, for starters; they've been duds for several years. That doesn't seem to make sense when you consider the aging population and the rate of growth in consumer health spending. Health-care stocks are generally considered to be recession-proof and therefore valuable during sketchy economic times. But it's not all sunshine and gumdrops in the sector. Specifically, companies in this corner of the U.S. economy are awash in product recalls, an increasingly stringent FDA drug-approval process, a bevy of cash-cow drugs with expiring patents, and a growing political will to deal with the rising cost of health care and the number of uninsured Americans.

Bottom line: It's hard to generalize about this catch-all category, which includes everything from drug companies to medical-device makers to pharmacies. But be wary of drug companies and others whose fortunes this year might be buffeted by presidential candidates' health-care policies. Still, with a generally downbeat economy, health stocks overall should be poised to do better than the average bear. One broad investment that could capture some of this recession-proofing is the T. Rowe Price Health Sciences fund. It has stellar one-, three- and five-year returns and a comfortable expense ratio of 0.87 percent.

Another head-scratcher is the consumer-staples sector--food, beverage, personal product, household product, supermarket and other "everyday" stocks. Even in a recession, people need the products made by these companies, so the sector is usually good during bad times. It's not as if this investment category has been in the red over the past year, but compared with other investment options, it has underperformed. Of the 10 sectors that make up the Dow Jones Total Market Index, for example, consumer goods came in seventh last year. (Health-care stocks came in eighth.)

The good news is that as the economy continues to slow, many analysts expect consumer staples to fare better and better. Stick with large, growing companies that make products people use every day, and they should soon be manufacturing additional profits for your portfolio, too.

Scott Bernard Nelson is a newspaper editor and freelance writer in Portland, Oregon.

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