As a fundamental investor, I generally pay far more attention to sales and earnings than price charts. But I sometimes like to see how certain stocks respond to certain conditions. Specifically, I study past performance during previous market downturns to identify pockets of strength.

A few outliers always manage to hold their ground when everyone around them is retreating. Some even exhibit a curious (and repeated) pattern of charging ahead during turmoil.

I don’t bring this up just for the sake of discussion. As I’ll explain in a moment, it looks like the economy is finally showing signs of a slowdown. So identifying picks that have proven resilient in previous downturns could be key in the coming months.

Is A Market Storm Brewing?

Consumers have been resilient up to this point. In fact, the latest monthly personal consumption expenditures (PCE) report from the Commerce Department showed a 0.8% uptick. That figure reflects both goods and services, although most families are clearly favoring the latter (travel, concerts, sporting events, etc.)

In any case, that trend looks to be stalling out. The Covid stimulus check piggy bank is nearly empty. Many households have been turning to plastic — even to cover basic necessities. From April through June, Americans ran up another $45 billion on their credit cards, piercing the $1 trillion balance for the first time ever.

_{Source: NY Fed}

Believe it or not, that’s just a drop in the bucket. If you include other household debt, such as car notes, the total tab has risen by $3 trillion since the pandemic and now stands at $17 trillion. Having depleted their reserves and exhausted other options, many workers are making emergency withdrawals from retirement accounts (rarely a good idea) to make ends meet.

That can’t continue for long.

Cutting Back (Finally)

Hence, all the predictions for tapped-out consumers to rein in spending on things they don’t need. Those warnings don’t just emanate from media pundits. We’re also talking about widely respected experts like Wharton Finance Professor Jeremy Siegel and Bond King Bill Gross. JP Morgan CEO Jamie Dimon echoed their assessment, saying we’ve been spending money like “drunken sailors” and that “the headwinds are substantial and somewhat unprecedented.”

Even the Federal Reserve Bank of San Francisco has chimed in, predicting that excess household savings could run dry as soon as this quarter. Frankly, I’m surprised it didn’t happen sooner. But the cumulative effects of inflation and rising borrowing costs take time to reach full potency. Meanwhile, after a long hiatus, student loan payments are about to resume for some 40 million borrowers.

Retailers are already seeing tangible signs that shoppers are cutting back.

Target (NYSE: TGT) just issued lackluster guidance, blaming the “constrained environment for consumer spending.” Home Depot (NYSE: HD) said something similar. Mastercard (which knows a thing or two about spending habits) has noticed fewer big-ticket purchases on credit card statements. Even Dollar General (NYSE: DG), usually a penny-picking beneficiary, sees fewer items in shopping baskets as discretionary purchases dwindle.

A recent Bloomberg poll found that half of respondents believe personal consumption will weaken in early 2024. Most of the rest think it will happen even sooner, before the end of the year. That’s an ominous consensus with consumer spending accounting for more than two-thirds of GDP.

Death And Taxes…

Now here’s where I’m going with this…

Last year, aggressive rate tightening spooked investors and drove the benchmark S&P 500 down 18%. Entire swathes of the market lost anywhere from a quarter to half of their value. Needless to say, most stock charts were pretty ugly. But H&R Block (NYSE: HRB) swam against the tide. The tax prep provider didn’t just eke out a positive return. It finished the year with a healthy gain of 59%.

It’s not the first time.

Go back 15 years ago to the financial crash and recession of 2008. That was an even rougher bear market, with the S&P 500 tumbling 36%. For most stocks, it was just a question of which number followed the negative sign. 19 out of every 20 ended the year with a loss. But H&R Block bucked the trend back then as well, advancing nearly 24%.

You might chalk this up to coincidence. But that’s simply not the case. The company’s stock rallied because its operations and bottom line flourished during those challenging times. While most CEOs were apologetically saying, “We’ll get ’em next year,” here’s how H&R Block summed things up…

Our results for the 2008 season were the best we have had in many years. For the fiscal year, we helped a record 23.5 million clients. Revenues grew 11.3% to reach $3 billion for the first time.

It’s not hard to connect the dots here. To paraphrase Ben Franklin, the only certainties are death and taxes. Economic down-cycles might freeze consumer and business spending, but they don’t relieve workers of their annual 1040 tax filing obligations. Tax prep assistance will remain in demand as long as the IRS exists.

Of course, others tend to stay on an even keel and can ride out even the fiercest of storms. And with dark clouds gathering, this just might be their time to shine.

Closing Thoughts

Which brings us back to H&R Block. Some businesses have natural immunity to economic slowdowns. They may be recession-resistant or, in rare cases, even recession-proof. Regardless of how bleak things get, people still get sick and require medicine. Families still have to buy groceries. And pay the electricity bill. They still have to replenish basic supplies like laundry detergent and toilet paper.

These non-discretionary goods are at the top of the budget. Some products (like alcohol and tobacco) are even considered counter-cyclical, meaning their demand moves inversely to the economy, and sales tend to rise when the economy tanks.

These are the areas I plan to focus on over at High-Yield Investing. If you think the economy is slowing down (like I do), then you’d be smart to do the same.

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