How to Identify the Best Investment Opportunities During a Recession?
Investing during a recession can be an incredibly stressful undertaking as markets plunge and the economic contracts – however there are several opportunities that are worth considering.
This can include investing in haven stocks like healthcare or consumer staples. Or trying to find countercyclical stocks that will grow as the economy in general suffers.
It can also be a good time to focus on value investing, finding companies that are undervalued on the market.
There are certainly ways to Investing During Recession.
The commonly heard definition of a recession is declining GDP numbers in two consecutive quarters.
The National Bureau of Economic Research (NBER) also defines it as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in GDP, real income, employment, industrial production and wholesale-retail sales.”
Understanding the economic environment during a recession
Let’s look at the economic environment during a recession in more detail.
- Factors affecting the economy during a recession.
One of the early signs of an impending recession is a weak capital market.
As GDP declines over at least two consecutive quarters, the economy can be affected negatively.
There is often lower production, high unemployment, and high inflation during a recession.
- Trends in various sectors
Although many people think the economy contracts across the board, there are several industries that are well insulated.
According to an analysis of the last recession in 2020 by Investopedia, there are several sectors that tend to do fairly well, including healthcare, information technology, real estate, communication services and consumer staples.
Some industries that generally fare poorly during a recession are:
- Travel and tourism
- Leisure and hospitality
- Service purveyors
- Manufacturing and warehousing
However, not all recessions are created equally so it’s hard to say with any certainty which industries will be most affected, either negatively or positively.
Identifying the best investment opportunities during a recession
Although recessions can be a stressful time as markets generally plummet, there are several possible avenues for financial gain during one.
- Safe-Haven Investments
One of the most popular ways to avoid the pain of a recession is to invest in so-called safe haven stocks, sometimes referred to as core sector stocks.
This can include investing in fast growth stocks haven as healthcare or consumer staples. Or trying to find countercyclical stocks that will grow as the economy in general suffers.
These are industries that are generally considered recession resilient.
Healthcare is a big one. You need it to live so you’re unlikely to defer on these expenses even when times are tough.
Consumer staples are also considered a safe haven investment. These are companies that make everyday items that people cannot live without, including food, beverages and personal hygiene products.
Clorox was a real winner in early 2020 as the demand for disinfectants and hand sanitizers skyrocketed at the beginning of the pandemic.
Communication services – including social media and internet companies, streamers, and video game markets – are also good safe haven investments to think about during a recession.
- Countercyclical investments
Countercyclical investments are those that are negatively correlated to the overall state of the economy. In other words, investments that do well during a recession.
They also tend to perform poorly when the economy is doing well.
It’s a little difficult nailing down which companies fit into the countercyclical investment world. Alcohol-related industries are often considered to be.
Discount retailers are also considered countercyclical investments because people will tend to shop there as they pull back on spending.
You could also consider Investing in the companies that operate for-profit prisons, as crime generally goes up during economic downturns.
- Value Investing
Value investing involves looking for stocks that look like they are trading below their intrinsic or book value. These are equities that the market is underestimating so they can be had for a discount.
Warren Buffet is perhaps the most popular value investor.
It can be somewhat challenging to find stocks that fit the bill because you’re going to have to go your own way from what the conventional wisdom is. This means looking at financial analytics and thinking about the long-term growth potential of each opportunity.
Evaluating Investment Opportunities
You’re going to want to match sure that whatever you’re investing in matches your personal investment goals.
Are you investing in the short, medium, or long term? Are you looking to minimize the risk of market volatility? Are you looking for a fixed income?
You should also make sure you have an emergency fund of at least two to three months of living expenses in the event that you suffer a health crisis or lose your job. Never invest the money from this fund.
Another way to evaluate your investment opportunities is to invest in mutual funds or exchange-traded funds that will spread your risk over a diverse investment portfolio, further insulating you from the swings of a bear market.
Some of the best advice for investing during a recession is: don’t panic.
It’s important to keep in mind that you are investing for the long term. Markets will inevitably contract during a recession and share prices might plunge.
It’s often impossible to “buy the dip” so it’s sometimes better to simply hold on, make smart investments in relatively safe industries and just wait out the economic storm.
This can involve looking for so-called safe haven stocks, countercyclical investments or value investing.
Above all, make sure any investment you make matches your personal financial situation. There are never a one size fits all approach to investing and that is certainly true during a recession.