The most important thing to remember when investing before, during, and even after a recession is that you should monitor the bigger picture.
That means you don’t have to try to time and track down your way into different market sectors, industries, and individual stocks.
The following are the best investment strategies you can use during recessionary times.
Considering the Macroeconomics
The first thing you should do is consider the condition of the macroeconomic aspects of the recession. Your goal is to determine how they affect the capital market.
When a recession is happening, the companies reduce their business investments. The consumers also slow down their spending. People’s perceptions switch from being optimistic to being pessimistic.
Rightfully so, investors tend to become fearful during recessions. They scale back in their portfolios and worry about the prospective investment returns.
Investing by Asset Class
If you look at history, equity markets have an interesting function as a leading indicator for recessions. For instance, markets began a steep decline during the mid-2000 before the recession hit in March to November 2001.
On the other hand, even when the market is declining, investors may still have some good news. There is still a handful of outperforming companies in the equity markets during these times.
Investing in Stocks during Recessions
During a recession in the stock market, the safest bets are usually the high-quality companies that have long business histories since these companies are typically businesses that can handle extended periods of market weakness.
Companies with strong balance sheets, little debt, and healthy cash flows often do much better than those with huge operating debt and weaker cash flows.
History suggests that the best place in the equity market is the consumer staples. Consumer staples are goods that consumers still buy regardless of the economic conditions.
Among consumer staples are food, beverages, household goods, tobacco, alcohol, and hygiene products.
Sticking to Diversification
At the same time, it’s not a good idea to just bet on one sector. Diversification should not be forgotten when dealing with a recession.
Don’t forget to diversify across different asset classes like fixed income and commodities. These assets can also act as a check on your portfolio losses.
Fixed Income Strategy
Fixed-income markets aren’t immune to the general pessimistic outlook during a recession. Investors usually veer away from credit risks, like corporate bonds and mortgage-backed securities.
These investment assets have higher default rates when compared to government securities.
With the weakening economy, companies find it hard to generate revenue and profits. This difficulty in turn makes it difficult to accomplish debt repayment. This may even lead to bankruptcy.
Commodity Investing Strategy
You can also take time to consider investing in commodities during recessionary times.
When the economy is growing, it needs inputs such as natural resources. As the demand grows, the prices of these commodities also grow.
On the flipside, when the economy slows down, the same happens to commodity demand. Investors will often sell commodities if they think that a recession is coming.
But remember that commodities are traded on a global basis. So, a recession in the US doesn’t necessarily have a big, direct impact on the prices of commodity.