An economic recession can lead to heightened volatility and uncertainty in investment markets. Stock prices typically plummet as the market experiences wild swings. This could result in poor investments for many investors. In fact, shareholders may sell their shares in a bid for safety.
However, the turmoil in the investment market during a recession can create profitable opportunities. Risk-averse investors would react quickly to news of a recession, re-positioning their portfolios in anticipation. On the other hand, inexperienced investors might stay away from investing to avoid the risks. So is investing in stocks during the recession a great idea or not?
Why Invest In Stocks During A Recession?
Many would love to know if investing in stocks during the recession is a smart idea or if it’s best to stay away. The truth is there’s no easy answer to this. However, experts suggest that investors should look into value stocks when there are low-interest rates to fuel growth because there are several stocks that may thrive even in a recession. In fact, the sharp declines in stock prices during a recession could present excellent opportunities to invest.
Some companies may have a business model that helps them stay resilient in an economic downturn. At the same time, some businesses may just be undervalued by the market. However, it’s essential to remember that financial markets are often cyclical. They typically show repeated patterns of recessions, expansions, peaks, troughs, and recoveries.
From what we know, every recession experiences recovery after some point. But the recoveries often don’t arrive soon or are not always big enough. Moreover, not all companies perform the same way at various stages during a recession. Similarly, some businesses may never recover from a recession, or it might take several years to do so.
What Stocks Should I Invest In During A Recession?
There are industries that thrive or remain unaffected during an economic recession. Their stocks are popularly known to be naturally resistant to difficult economic conditions. These industries remain afloat even in a recession due to changing behavior and consumption patterns.
They often provide absolute necessities that consumers will always need or have characteristics that make them favorable to an economic downturn. These industries include healthcare, utilities, resource commodities, infrastructure, military equipment, and low-cost businesses. Some companies in these industries are often tagged as recession-proof, as they will typically excel even in a recession.
Strategies For Investing In Stocks During A Recession
Regardless of how risky it is to invest in stocks during a recession, some risk-averse investors will try to take advantage of the market. They often come up with their investment strategy to position themselves for a profit. However, every investor has a unique strategy. What works for one investor may not work for the other based on their risk, wealth, and preferred asset maturity. But based on market trends, two main types of stocks thrive during a recession. These are dividend-paying stocks and stocks offered by companies that provide basic commodities.
Many financial advisors suggest that investors willing to take risks during a recession should consider investing in dividend-paying stocks. That’s because they’re often less volatile than non-dividend-paying stocks and provide investors with a steady income that can be helpful during uncertain times. Though the value and regularity of these returns may also be impacted by the recession.
Another reason to invest in dividend-paying stocks is that investors benefit from the power of compounding when they reinvest their dividends. If the stock is held long enough, the dividends from stocks traded on major U.S. stock exchanges are tax-advantaged (although this depends on the company offering the stock). Thus, it implies that even if the dividends are taxed, they would be taxed at lower rates than the typical income.
Stocks From Companies Offering Necessity Commodities
Stocks from companies that provide commodities that consumers always need often thrive even during challenging economic times. That’s because consumers will always demand these commodities. In fact, consumers will likely shift their spending to meet their daily to everyday necessities during an economic downturn. The shift in consumer behavior may cause many companies in a given industry to profit; not unlike Amazon during the COVID-19 pandemic. Consumer staples and health care stocks are some excellent examples of ‘recession-proof’ stocks investors can look at.
Investing in stocks during a recession can be highly risky, but it can also be extremely profitable. Some industries can seem like a goldmine in a recession, while others may look like a dead end. The important thing is that the investor knows the right stock to buy, as investing in the wrong company can present higher financial consequences.
Owner of The Stock Dork
Adam is a born and bred entrepreneur who thrives on developing the successes of others while equipping them with the knowledge and resources to create real opportunities for themselves. He has had a passion for finance and investing since high school which led him to create TheStockDork.com as a resource for all investors. Before starting TheStockDork.com, Adam founded and operated an Investor Relations Firm. Throughout the years, he has transformed into a leader who has blazed the trail for many new investors and traders by showing them the ins and outs of obtaining financial freedom.