For more than a decade, making money investing in stocks has been extremely easy. A combination of robust economic growth and record-low interest rates has made it easy for U.S. companies to thrive and stock prices to rise.
However, making (or preserving) money in the market during a recession is a much more difficult prospect, and successful investors often take a completely different approach to the market during an economic downturn.
A recession is a general decline in economic activity over an extended period. Many define a recession as two consecutive quarters of negative GDP growth.
Whether it’s the first recession you’ve experienced firsthand or your portfolio has gotten burned badly in previous recessions, here are eight recession investing strategies that could help you navigate the downturn.
1. Do Not Dump All Stocks
When a recession hits, stocks underperform in the near term. But while it may seem like a good idea to sell all the stocks in your portfolio, selling them when they are down is rarely a good idea.
If you’re losing sleep over the day-to-day fluctuations in the stock market, it may be a good idea to dial back your exposure to stocks. It’s likely a sign you had too much of your investments in stocks in the first place. However, recessions are a relatively routine occurrence in the market. In fact, there have been 33 U.S. recessions since 1854 (about one every five years), and investors who held onto stocks or bought the dip eventually came out ahead every single time.
2. Reassess Your Holdings
Once again, everything looks like a good investment when the economy is booming and the credit market is flowing. When a recession appears imminent, investors should take a fresh look at all their stocks and other holdings and remember why they invested in the first place. Ask yourself what was your thesis on each stock you own when you bought it. Has the near-term economic outlook fundamentally changed that thesis? Or has it simply created a near-term hurdle for the company to overcome?
The coronavirus sell-off may have hurt the near-term outlook for Apple, Inc. (NASDAQ: AAPL), but iPhone demand will likely ultimately be just fine in the long-term.
3. Buy Consumer Staples
Every stock is at risk during an economic downturn. Even stocks that don’t lose money are at risk of experiencing earnings multiple compression. However, certain stocks have businesses that are not cyclical in nature and are relatively insulated from economic downturns.
Consumer staple stocks are historically relatively good investments during stock market downturns. Americans may buy fewer gadgets or go on fewer vacations during a recession. But they will still buy toilet paper, shampoo and trash bags.
Discount retailers like Walmart Inc (NYSE: WMT) sell these products, and their low prices appeal even more to shoppers when the economy is on shaky ground.
4. Raise Cash
One of the best ways to get defensive during a recession is to increase your cash position. Cash provides the ultimate flexibility and the most peace of mind when times get tough in the market.
The U.S. dollar is the closest thing to a zero-risk asset over the short term. However, given interest rates on savings and money market accounts have recently plummeted to near zero, investors likely won’t be able to offset inflation over the medium to long-term. In other words, your cash slowly loses buying power to inflation the longer you hold it.
5. Buy Dividend Stocks
Following two emergency Federal Reserve interest rate cuts in March, the yield on 10-year U.S. Treasury bonds has fallen all the way to 0.8% (at time of publication). Income investors have few choices these days other than buying dividend stocks, which have historically been good sources of income during recessions. The only thing dividend stock investors must watch out for during an economic downturn is dividend cuts.
For example, Boeing Co (NYSE: BA) completely suspended its 6.8% dividend on March 27. To minimize the risk of buying a stock in danger of a dividend cut, look for stocks with positive free cash flow, stable earnings, low debt levels and a relatively low payout ratio.
6. Buy Utilities
One of the more defensive sectors to buy during a recession is the utilities sector.
Like consumer staples, even in a worst-case scenario, Americans will do everything they can to keep the lights on and the water flowing in their house. Many utilities have rates set or limited by regulations, meaning their pricing and margins are relatively stable even during a downturn. In addition, utility stocks often trade at low earnings multiples, suggesting valuation protection to the downside.
Finally, utility stocks are known for their dividends and can generate income for investors assuming they pass the dividend risk test mentioned above.
If you’ve been reading about different recession investing strategies from different sources and finding conflicting information, it may be because the two sources are making recommendations based on two different investing time horizons.
Younger investors that can be patient for years or even decades can afford to be more aggressive in buying stocks. Stocks are extremely unpredictable in the short term, but have historically been extremely consistent over the long-term (30+ years). Investors that need access to cash for retirement or a large purchase within the next several years should take a more cautious approach to investing, sacrificing potential upside to reduce risk.
8. Have A Watch List
It’s extremely difficult to make rational decisions on a day where the S&P 500 is up or down 5% or more. Investors that make buy and sell orders based on fear and/or greed typically don’t perform well over the long term. One way to avoid impulsive trades is to create a watchlist of stocks you are interested in buying well before they hit your target prices. By creating a watch list, you can take your time in performing your due diligence in learning and analyzing a stock well in advance of when you actually pull the trigger.
During the next big down day in the market, you don’t have to scramble to react. Just trust in the work you put in beforehand and buy the stocks on your watchlist.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
