How To Invest in a Recession
The financial markets are constantly changing with the potential for economic conditions to
range from rapid growth to precipitous decline. Of course, it is always preferential to be
investing in a growing economy, but this is not always the case and it is completely out of your
control. Fortunately, there are certain investment strategies geared towards dealing with an
economy on the verge of or in the midst of a recession.
Definition of recession
In general, a recession is a specific period of time that is marked by a significant decrease in
economic activity. Although there may be various definitions of what is considered a recession,
most economists will define a recession as two consecutive quarters of declining gross
domestic product (GDP).
Characteristics of a recession
During a recession an economy will experience declines in consumer confidence, weak
employment, and falling or stagnant wage growth. Recessionary periods are also characterized
by low sales and production, declining real income, and low confidence among businesses.
These are less than ideal conditions for investors looking to earn gains on their portfolios.
Risk aversion and overreacting
When signs of an oncoming recession begin to appear, investors tend to become more risk
averse in their investing decisions. This could lead many investors to begin selling their
positions out of fear. However, it is important that you do not overreact to the hints of a future
recession. Historically, economic gains have tended to continue much longer than what market
participants expect. In fact, most of the large gains tend to come towards the end of the
expansionary period preceding a recession.
Best performing asset classes during recessions
During recessionary periods the types of assets which perform well during expansionary periods
tend to underperform. Therefore, you may want to know which asset classes have historically
performed well and maintained value during recessions. Generally, asset classes that do not
rely as much on economic growth will perform well during times of economic contraction.
However, each situation is unique which means you may want to consult a financial
professional. Certain types of stocks tend to perform better than others.
Picking stocks for recessions
Choosing the right stocks for your portfolio can help you weather the storm of a recession and
will help to maintain the value of your portfolio. Generally, stocks that have a long track record of
resilience during previous recessions may be your best bet when it comes to stock picking in a
challenging economic environment.
You should try to find companies that have strong balance sheets as well as good cash flow.
Also, avoid companies with large amounts of debt or those experiencing falling demand for their
services or products. Additionally, companies that provide consumer staples, such as food,
beverages, and household goods perform well since consumers will have to purchase these
items regardless of the economic conditions.
Once the economy starts to recover, certain assets that were hit hard during the recession will
experience rapid growth. You may want to be ready to capitalize on this recovery-induced
growth. Generally, commodities, small-cap stocks, and growth stocks will see significant
appreciation during the recovery period for the economy.
Any opinions are those of the author and not necessarily Raymond James. Any information provided is for informational purposes only and
does not constitute a recommendation.