Buying these 2 stocks is a good way to protect against a stock market crash
Investors got a taste of a bear market in early 2022 when widely followed stock indices fell more than 10% from recent highs into correction territory. The technology manager Nasdaq Compound the index even reached a bearish level with a drop of more than 20% in early March.
Markets are yet to return to new highs and another stock market crash is about to occur. It’s part of investing, and no one can predict when it will happen. But if you’re worried about recent declines, it would be a good idea to consider investing in these two names that can help you stay relaxed during the inevitable declines.
Make it a win-win
Every severe market downturn is different, of course. The cause(s) of a bear market will determine which stocks are hardest hit. If a recession is the trigger, some companies will continue to do well, even if their stocks move with a market trend. Two of these companies are big-box discount retailers Wholesale Costco ( COST 2.09% ) and manufacturer of spices and flavors McCormick (M.C.C. 1.28% ).
Consumers looking to cut spending will turn to buying non-discretionary items where they can get the best value and are likely to eat out less often. Costco and McCormick benefit from both of these trends. So while these stocks may fall along with most other stocks in a bear market, investors can rest easier knowing that the underlying companies are likely to hold up well. Using the Great Recession of 2008/2009 as an example, although Costco’s sales – and its stock price – declined, both quickly recovered and the stock outperformed the S&P500 index coming out of this period.
Whether it’s a recession or some other catalyst that triggers a stock market crash, the market and the economy will eventually recover. As the following chart shows, the overall trend of economic growth in the United States is strongly upward over time.
While economic downturns and recessions can be painful at the time, the bigger picture shows that they become just a blip in the overall growth pattern.
Follow the trend
As the economy grows over the long term, investors have also been rewarded with Costco and McCormick stock returns since 1990.
Act like a hedge
As mentioned, Costco and McCormick both offer a way to minimize the inconvenience when consumers change their spending habits on essentials. McCormick’s consumer segment leverages home cooking expenses. This typically increases when times are tough and people are worried about big drops in their portfolios and net worth.
But the company’s flavor solutions segment also serves the needs of commercial foodservice, including restaurants and entertainment venues. These sales were up 12% in the fiscal first quarter ended Feb. 28, compared to the prior year period, as consumers continued to venture more. For the full fiscal year 2021, flavor solutions represented 38% of McCormick’s net sales. This shows the balance it has with home consumption and entertainment spending.
Costco and McCormick also share profits with investors as dividends. Costco chooses to have a relatively low base dividend and pay special dividends to shareholders during good times. This has happened four times in the past decade, and both companies have increased their dividends consistently over that time.
Market declines and even crashes will occur. Investors need to time them to ensure that emotions and panic don’t take over at the most inopportune times. Owning shares of Costco and McCormick can provide stability in these scary times. The companies themselves can continue to thrive when the economy falters, helping both companies continue to pay a reliable dividend just when investors need more security.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.