- The prospect of a recession appears to hang over our economy like a dark cloud.
- Although most stocks are more volatile during a recession, some industries tend to perform better than others in a recession (see list below).
- Prepare for the possibility of a recession by investing in resilient industries.
As we approach 2023, many experts are predicting Recession on the horizon. Although experts cannot agree on whether or not we will experience a recession, many expect at least a slowdown in economic growth.
When a recession looms, investors can’t help but wonder about the best options for their funds. After all, an economic downturn does not affect all investment opportunities in the same way.
But knowing what to invest in during a recession is easier said than done. Fortunately, we’ve got you covered in detail for solid investment opportunities that tend to resist a recession.
Are we in a recession?
Before we delve into resilient industries, let’s talk about the question on every investor’s mind.
When an economy experiences a decline in gross domestic product (GDP) in two consecutive quarters, this is generally considered a recession. However, the federal government allows the National Bureau of Economic Research (NBER) to make the final decision on whether or not the country is in a recession.
Although we’ve seen a drop in GDP for the past two quarters, NBER hasn’t declared this economic climate a recession yet. But if things continue on this path, with the economy feeling the tightness of the Fed’s increasing interest rates, it is very likely that we will see a recession in the coming months.
The idea of slack brings some dark images to mind. Instead of just waiting for this inevitable part of the business cycle to happen, it’s better to take action and prepare your finances. If you already have an emergency fund, you may decide that the next order of business is to adjust your investment portfolio for an increased risk of deterioration.
Defensive Stocks in Resilient Industries
When a recession occurs, not all industries are affected in the same way. Let’s explore some of the top defense industries that tend to stay on the cutting edge of major disruptions.
When a recession occurs, it does not mean that people are giving up their vices. Instead, the demand for some of these industries remains fairly stable regardless of the economic climate.
For example, long-term research from the United States indicates that Demand for alcohol Relatively resilient, even in tough economic times. And with this relatively unchanged demand, companies can continue to do well during a recession.
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FMCG with inelastic demand
Not all consumer goods are good bets during a recession. Usually, non-essential items that people can do without in tough economic times are something to be avoided. But companies that sell consumer goods with inelastic demand (demand that does not change regardless of times) are usually a good choice.
Consumers can’t avoid buying basic food or hygiene products during a recession, so companies selling essentials in grocery stores often weather the recession.
For example, investing in a company like Procter & Gamble, which sells a wide range of basic consumer goods, might be a good option.
Other than companies that sell these basic products, look for companies that provide the link to consumers. Discount stores that regularly drop prices on in-demand products attract a crowd during downturns. Walmart comes to mind as a popular discount store that tends to stay busy even when times are tight because consumers are looking to ramp up their dollars even more.
People get sick no matter where the country is in the business cycle. If someone is sick or injured, they won’t wait for the pull of the economic storm to pass before heading to the doctor.
When researching stocks in the healthcare industry, look for companies that manufacture or offer essential products that consumers can’t do without. For example, Johnson & Johnson and CVS are two worthwhile options to consider.
The basics of human life do not change during a recession. After all, we cannot easily live without the electricity and water that power our lives.
As an investor, you can choose to invest in standard utility companies, or you can invest in the energy future. After all, clean technology is becoming increasingly popular to create cost-effective solutions for consumers looking for a greener source of energy.
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When a recession hits family budgets, utilitarian transfer is one of the things not many people can give up on. After all, income earners still need to work. Based on this reality, most employees find a way to continue paying their transportation costs.
However, the demand for non-essential air travel tends to decline during a recession. For example, many families will choose to travel to a new vacation destination when money is simply not in the budget. As an investor, these trends will direct you toward companies that help people get into work.
What to Consider While Investing During a Recession
Before you prepare your investment portfolio for a recession, there are some overarching principles to keep in mind. Here are some key concepts to think about:
- Volatility will occur. The stock market is volatile by nature. With a recession approaching, it is common for the market to experience some violent volatility. Instead of being caught off guard, prepare your mind for the ups and downs.
- Think about your long-term goals. Recession is a normal part of the business cycle. Although it hurts to see the stock market plummet, it’s important to keep your long-term goals in mind. With a long-term outlook, it’s easy to weather the storm.
- Stick to your plan. Sticking to your portfolio strategy throughout the market cycle is the key to long-term success. When things seem bleak, do your best to stick to the plan.
- be realistic. It is natural for your fears to increase when the market is on a roller coaster ride. Stick to the investments that fit your comfort level.
- Outsourcing and Automation. If you don’t want to deal with the almost inevitable stress that comes with monitoring your portfolio to maximize your returns, consider automation. The advent of technology means that you can outsource your portfolio management to artificial intelligence. This reduces the risk of changing course out of fear.
Of course, the investment portfolio is not completely protected from risk. This is just the nature of the stock market. But by building a balanced portfolio with your long-term goals in mind, you’ll be in a reasonably good position to beat whatever the economy gets in your way.
Conclusion: How to Invest for a Recession
When turbulent times look as if the economic sky is turning back, it is tempting to sell out of the market altogether. But doing so during an economic downturn means you may miss out on the bounce. Instead, build a diversified portfolio that fits your long-term investment goals.
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