Rising interest rates, bearish stock markets, high inflation, geopolitical risk, and disrupted supply chain are warming up the global economy for a recession.
Typical investor behaviour will be to switch to a risk-off mode and become conservative with investment decisions. But in every economic cycle, there are opportunities.
While there is no asset that is totally recession-proof, there are a few assets that give positive returns in a recession. Analysts often advise investors to stock up on defensive stocks with fixed margins, steady cash flow and consistent dividends during recessions. Historical data shows that stocks in the consumer staples and healthcare sectors have outperformed the market during recessions.
According to CFRA Research,
(a multinational independent investment research company) these two sectors have had positive returns in every recession since 1990. For example, WALMART was able to leverage economies of scale to sell goods at a discount and so it reported revenue growth in the three years following the great depression. It is however important to note that sectors that do well during recessions do not perform as well as other sectors during times of economic boom.
The bearish momentum in the stock market presents an opportunity for investors to get in on blue-chip stocks at low prices. Given that no one knows how low the market will fall, investors can take the dollar-cost averaging approach (investing specific amounts at regular intervals) to investing in the stock market. Our research analysis of Tesla shows that if you spent $100 monthly in the past 3 years buying Tesla stocks, your investment would have gained over 400% despite the downturn in the stock market. Keep in mind that past gains do not guarantee future returns.
Another asset investors can take advantage of in a recession is real estate. High-interest rates will discourage investment in real estate properties given their effect on mortgage rates. This will pull down the demand and price of real estate properties.
Most importantly, investors need not panic. Though recessions and volatile markets can be terrifying, long-term investors with an investment plan, need not bother about short-term market movements. Your investment plan will uphold your investment portfolio.