Recession-proof ways to make money

The Federal Reserve is the dog, and the stock market is Ivan Pavlov, training its pet to cut interest rates on demand. It's worked twice this year, and it's expected to work again when the Fed meets today. And then what?

The market officially corrected in October and November -- we saw the required 10% decline -- and, with easy money from the Fed, it's not unreasonable to argue the worst of the current round of volatility is behind us. Christmas rallies are a tradition.

But the market could just as easily continue to struggle. When White House officials announced a "solution" to the subprime-mortgage mess, critics proclaimed it a pretty ribbon around an empty box. The Fed needs to worry about inflation and the dollar as well as Wall Street. Consumer spending, which accounts for two-thirds of gross domestic product, is weakening.

But some forms of spending do not weaken as much as others. Addicts will buy cigarettes at almost any price. When factories are emptied, saloons fill up. People don't stop going to the doctor or paying their electric bills.

These three arenas -- "sin" stocks, health care and utilities -- are traditional refuges from market adversity. Indeed, investors are already flocking to them. Vice Fund (VICEX), T. Rowe Price Health Sciences (PRHSX) and MFS Utilities A (MMUFX) are having banner years. Unless the bull stages a big run, their good fortune is likely to continue. And the bull is facing a stone wall.

According to The Outlook, an investment newsletter published by Standard & Poor's, S&P chief economist David Wyss has "elevated his recession-risk estimate to 40% from 33%." He's forecasting economic growth of 1.4% this quarter, down from 3.9% in the third period, and growth of just 0.6% and 1.5% in next year's first and second quarters, respectively.

Defensive funds are looking better and better, and these three funds have some strong offense as well.

Sin is always in

Charles Norton, the fund's manager, calls these groups "economically independent growth."

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"Tobacco, aerospace and defense, and alcoholic beverages tend to be much less sensitive to economic cycles," Norton says, and he notes that "gaming goes up year in and year out."

Tobacco use in the developed world is dropping 2% to 4% annually, but in the developing world, Norton says, "one of the first things you notice is how many people smoke." Similarly, beer consumption is flat in the developed world but growing rapidly in emerging markets. So the fund is short Anheuser-Busch (BUD, news, msgs) and long InBev, a Belgian brewer that is the world's largest and the largest distributor in Asia and central Europe.

Vice Fund was up 21% this year as of Dec. 6, and that's no flash in the pan. It has gained an average of 17.8% annually for the past three years and 21.5% for the past five.

The lights will stay on

Claud Davis, an electric-utility analyst for MFS, says the fund is following two broad themes. The first is investing in established power companies that are guaranteed by regulators a return on new investment as they expand their market bases. Northeast Utilities (NU, news, msgs), one of the fund's top holdings, has approval to spend billions on new transmission lines that should bring a 13.4% return on equity, Davis says.

Video on MSN Money

Tobacco stocks are on fire
Bonnie Herzog, a Citigroup Investment Research beverage and tobacco analyst, and CNBC's Erin Burnett examine the surging 'sin' sector.

The other side of the business is power generation. "There is a shortage of generating capacity in the United States," Davis says, and companies the fund owns, including Reliant Energy (RRI, news, msgs), have extensive investments in infrastructure that give them competitive advantages. "They have steel in the ground, and that's like lakefront property -- they're not building it anymore."

Continued: Someone's always ill

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