Estimated reading time: 9 minutes
In October 2022, a recession seemed like it was right around the corner.
With mounting inflation and corresponding interest rate hikes by the Federal Reserve, it seemed inevitable that the economy would eventually face headwinds. In fact, Bloomberg economists forecast a near 100% chance of recession by October 2023.
Well, it’s December 2023, and the economy’s still standing — in fact, it’s thriving.
No country in the G7 has fared better economically since the beginning of the pandemic. Despite substantial strikes across the labor force, unemployment remains near a record low. The Nasdaq Composite Index is up over 35% for the year.
So, are we home clear? Not quite.
Despite all the signs of resilience, a recession still may be just around the corner — on average, they happen every seven years. That’s why it’s imperative to plan ahead and consider what you should do for your portfolio if (once) the next recession hits.
In this blog post, we'll explore the dynamics of investing during uncertain economic times. This includes the potential benefits of investing during a recession, key considerations, and six potentially recession-resistant assets to consider for your portfolio.
A recession is often defined as two consecutive quarters of declining real gross domestic product (GDP). However, it's important to note that it's more than just economic statistics. Recessions bring about various challenges, including high unemployment rates, reduced consumer spending, and decreased business investments.
In the 21st century, we've already weathered three recessions, including the dot-com crash of 2000-2001, the Great Recession of 2007-2009, and the brief Covid-19 Recession of 2020.
Given the cyclical nature of economies, it's not a question of if another recession will occur, but when.
That's why it's crucial to refine your investment strategy and seize the unique opportunities that often arise during economic downturns. In this section, we'll explore strategies to help you navigate and potentially benefit from the dynamics of a recessionary environment.
During a recession, financial markets can experience significant fluctuations. Before investing, evaluate how comfortable you are with the potential for temporary losses in your portfolio.
Are you investing for long-term retirement savings, a major purchase, or another objective? Your goals will influence your risk tolerance. For long-term goals, you may be more willing to withstand short-term market swings.
If you’d like to keep risk to manageable levels, then you’ll want to consider diversifying your portfolio. Determine an appropriate asset allocation based on your risk tolerance and financial goals. For example, if you have a low risk tolerance, you may allocate a larger portion of your portfolio to less volatile assets like bonds, rental properties, and precious metals.
Dollar-cost averaging (DCA) is a powerful strategy that can serve as a rational anchor during the emotionally charged periods of recession.
With DCA, you commit to investing a fixed amount of money at regular intervals, regardless of the market's ups and downs. This steadfast approach continues even during a recession when asset prices often dip, and can result in lower average costs over time.
The true strength of DCA lies in its ability to eliminate the need for market timing. Instead, you invest steadily, capitalizing on the natural ebbs and flows of the market.
Further, DCA promotes unemotional investing and instills discipline. By spreading your investment risk over time, it cushions against the impulse to put all your money into the market at once, potentially shielding you from the impact of a sudden market downturn.
One way to practice DCA is to establish automatic, consistent payments to your 401(k), IRA, or other investment account. This allows you to take advantage of your retirement account contribution limits while maintaining a steady approach, regardless of the economic climate.
During a recession, asset prices often decline across various markets, including stocks, real estate, and even certain commodities.
During the global financial crisis, stock prices plummeted. Shares of companies with relatively firm foundations like Apple and Amazon saw significant declines. Investors who capitalized on these lower prices and held onto their investments have since seen substantial returns, as these companies recovered and continued to grow.
The real estate market also suffered during the 2008 financial crisis, with property values dropping significantly. Investors who purchased properties during this downturn benefited from the market's eventual recovery and the subsequent rise in property values.
Of course, timing the market is notoriously difficult. However, if you’re able to maintain liquidity in a recession while others don’t, you may gain a leg up in being able to purchase undervalued assets.
Let’s get one thing straight: there is no such thing as a recession-proof investment.
That said, there are certain types of assets that have historically weathered the effects of recessions better than others:
Even when the economic outlook is uncertain, one trend is clear: the United States population is aging.
Since 1960, the US fertility rate has plummeted to less than ½ of its peak, far below the replacement rate. This has led the population of children to stagnate over the last 10 years, at the same time that the share of residents who are 65 years or older grew by more than a third.
While this may present some demographic challenges in the future, it may also provide relatively recession-resistant growth for healthcare and pharmaceutical companies. Healthcare costs for those 65 and older average over $11,000 per year, nearly triple the cost for those in their 20s and 30s.
The need for medical treatment and drugs doesn't significantly decrease even in economic downturns, as these are critical needs, not discretionary spending.
Further, ongoing research and development in pharmaceuticals and biotech may create new growth opportunities, independent of economic cycles. These new developments receive special protections: government and insurance funding for healthcare expenses, along with regulatory protections like patents, provide stability to the sector.
When a recession hits, hyperinflation often follows.
While the United States has never experienced hyperinflation, dozens of countries across the globe have, ranging from Austria to China to Turkey to Zimbabwe.
Recessions themselves do not directly cause hyperinflation. However, they can unveil underlying economic vulnerabilities, such as flawed monetary policies or rampant money printing, which then lead to hyperinflation.
In the 1980s and early 1990s, Argentina found itself trapped in a relentless cycle of recessions and economic turmoil. The government's monetary policies unintentionally triggered a prolonged period of hyperinflation. Supermarkets grappled to maintain stocked shelves, with grocers having to update price tags several times daily. At its peak, the inflation rate surged to a staggering 2,600% annually.
More recently, in the 2010s, Venezuela grappled with an economic recession triggered by plummeting oil prices and production-stifling policies. The government's short-term solutions only aggravated the situation, steering the country towards its ongoing hyperinflation crisis.
The advent of cryptocurrencies like Bitcoin and Ethereum has reshaped the financial landscape. Prior to these digital currencies, residents of countries experiencing hyperinflation had limited options for safeguarding their wealth against rapidly depreciating local currencies. Now, they have an alternative.
While cryptocurrencies are often looked down upon for their high volatility and limited regulatory frameworks, they may present a far cozier alternative to a rapidly depreciating national currency. The increasing acceptance and integration of blockchain technology and cryptocurrencies across various sectors are likely to sustain interest and investment in these digital assets.
When market opportunities arise, you need liquidity to take advantage of them. For this reason, cash and U.S. Treasury Bonds can be crucial components of a recession-resilient investment strategy.
Cash provides unparalleled liquidity, enabling quick responses to financial changes, whether it's covering expenses during income reduction or seizing market opportunities in downturns. Maintaining a cash reserve acts as a financial cushion, helping manage living costs without selling investments at unfavorable prices during economic challenges.
For instance, Warren Buffett's Berkshire Hathaway had substantial cash reserves leading up to the 2008 crisis. This allowed Buffett to make opportunistic investments, including buying into companies like Goldman Sachs and General Electric at bargain prices. These investments were made when these companies' stocks were significantly devalued due to the crisis, and as the market recovered, these investments yielded substantial returns.
U.S. Treasury Bonds, on the other hand, are highly sought after in recessions due to their safety, reliability, and liquidity. Issued by the federal government, they offer a virtually risk-free way to preserve capital and receive steady returns, with minimal default risk. These bonds are backed by the full faith and credit of the U.S. government, which has never defaulted on its debt.
During recessions, consumers tend to prioritize spending on essential items, cutting back on discretionary purchases.
This shift in consumer behavior benefits consumer staples companies as their products are deemed non-negotiable. Consequently, these companies often experience steady demand for their products. This can help them maintain consistent revenue streams even in economic downturns while other firms suffer.
Procter & Gamble, a multinational consumer goods corporation, is known for its wide range of personal health/consumer health, and hygiene products. During the 2008 recession, while the S&P 500 fell by approximately 38.5% in 2008, P&G's stock was much more resilient, declining by only about 15%.
Walmart, the multinational retail corporation, actually experienced growth during the 2008 recession. Its fiscal year 2009 sales increased by 7.1% to $401 billion, and its net income rose by 5.8% to $13.4 billion. Walmart's success during the recession was likely due to its focus on low prices, which attracted cost-conscious consumers.
Real estate is a tangible asset with intrinsic value. Even in economic downturns, people still need places to live, especially close to their school or workplace.
Income-producing real estate, such as rental properties, can continue to generate rental income. In fact, housing markets often suffer during recessions, leading more people to turn to renting, which can keep rental markets buoyant.
During the 2008 financial crisis, for example, rent prices continued to increase while the stock market plummeted. Investors who owned multi-family units benefited from continuous rental income, as the demand for affordable housing remained strong even during the recession.
Properties near universities tend to remain stable during recessions. As the labor market dries up, many view recessions as a good opportunity to go back to school, increasing the demand for housing in those areas.
Still, investing in real estate during a recession demands thorough market research and effective property management. The stability of a rental market can depend on various factors, including local employment rates, population growth, and the economic health of the region.
For more in-depth information on investing in real estate during a recession, watch our webinar, Real Estate Investing Lessons From Past Recessions.
Similarly to cryptocurrencies, precious metals may offer a bulwark against hyperinflation risks.
These assets possess a unique ability to not only preserve their value but often appreciate when traditional assets like stocks and bonds falter. Plus, the high liquidity of gold and silver provides the flexibility to swiftly convert them into cash when circumstances necessitate.
However, investors must approach precious metals with a discerning eye. These assets come with certain drawbacks, including a lack of income generation potential, storage costs, and inherent price volatility.
If you’re interested in exploring real estate and precious metals for your portfolio, you may want to consider the benefits of a self-directed IRA (SDIRA).
These powerful retirement accounts allow you to pair the benefits of real estate and precious metals investing with the tax-advantaged growth of an IRA. In fact, you’re able to invest in any asset the IRS allows, including private equity and cryptocurrencies.
This diversified approach can serve as a formidable shield against the inherent volatility of the stock market. If equities take a nosedive during a recession, having investments diversified across sectors can act as a cushion, mitigating the impact of substantial losses.
While accurately predicting the market remains incredibly difficult, one strategy to potentially enhance long-term returns is to minimize tax liability.
In a traditional SDIRA, taxes on gains are deferred until the funds are withdrawn. So, account holders often wait to make a distribution until they’re retired and in a lower tax bracket. This strategy can lead to a lower lifetime tax bill. Conversely, a Roth SDIRA offers the allure of tax-free growth, with qualified withdrawals exempt from taxation.
Wondering if an SDIRA is right for you? Get our SDIRA Basics Guide.
This guide serves as a comprehensive introduction to SDIRAs. It provides insights into the benefits they offer, what you can and cannot invest in, and a simple three-step process to open your account.
History is clear: the challenge of economic downturns is not to be taken lightly. However, if you’re well-positioned, recessionary periods can also bring tremendous opportunity.
Whether you're contemplating the purchase of undervalued stocks or exploring the expansive world of alternative assets, the key is to stay informed, remain flexible, and plan strategically.
All investments carry some level of risk, and diversification is key to managing that risk. That’s why thousands have taken the plunge and opened an SDIRA. They’ve rounded out their portfolios with real estate, private equity, and other alternative assets. By spreading risk, they’ve established a robust financial foundation that may pay dividends once the next recession hits.
If you’re ready to find out what an SDIRA can do for your portfolio, talk to an SDIRA expert today.
Alternatively, if you're primarily interested in real estate investments have fared during past recessions, watch a replay of our recent webinar, Real Estate Investing Lessons From Past Recessions,
We were joined by Patrick Grimes, CEO & Founder at Invest on Main Street. In the session, Patrick guided viewers on exactly what happened in 2008, recessionary factors to consider when investing, and tips for building a recession-resilient portfolio.