The Best Stock Investments During a Recession

Traders work on the floor during the opening bell of the New York Stock Exchange in New York on May 16, 2022. Timothy A. Clary/AFP via Getty Images

The Dow Jones Industrial Average has lost roughly 14 percent in the first five months of this year. The tech-heavy Nasdaq Composite Index slipped into a bear market by falling 28 percent year-to-date, and the S&P 500 is on the bear market’s doorstep by tumbling 19 percent.

The latest performances in the stock market could give investors some pause before buying into the equities arena. The Federal Reserve Bank of New York’s recent Survey of Consumer Expectations revealed that only 38 percent of Americans think U.S. stock prices will be higher one year from now.

So, where should investors start parking their capital and how should they put their money to work?

A crucial investment strategy is to establish a road map for investing. Essentially, what do you want your portfolio to look like once the peak of the storm has passed through the financial markets?

Instead of trading in and out of securities and speculating on names, Michael Ashley Schulman, the chief investment officer of wealth management firm Running Point Capital Advisors, recommends establishing a solid financial plan.

Traders work on the floor of the New York Stock Exchange (NYSE) on April 25, 2022. Spencer Platt/Getty Images

“Every environment and cycle is different and one typically wants to have a solid financial plan or long-term road map rather than just a notion of trading in and out of individual names and industries; most people and professionals are not good at market timing,” Schulman told The Epoch Times.

Seeking Value

​​JPMorgan Chase is urging investors to prepare their portfolios now for slowing growth in the future.

Investors could transition to sectors that can generate consistent cash flows and outperform once growth is scarce, such as health care and technology, according to Jacob Manoukian, JPMorgan’s U.S. head of investment strategy.

“For the first time since the pandemic began, investors are being paid an adequate return to invest in what we believe is a relatively safe asset that would likely offer portfolios some protection if a recession does come to pass,” he stated.

But a “buy-the-dip” mentality could be a reliable strategy as investors seek discounts for value stocks with sound fundamentals and strong long-term prospects.

Instead of being more conservative during a recession, the best investment tactic “is to become more aggressive,” says James Royal, a senior investing and wealth management reporter at Bankrate.

“The rationale is simple: After stocks have fallen, investors are paying a lower price for the future growth of those businesses. It’s the classic ‘buy low, sell high’ that everyone knows but that relatively few can practice because fear so often gets in our way during a market downturn,” he said.

Stock funds and dividend stocks are some of the best investment vehicles investors could consider.

Exchange-traded funds (ETFs) that replicate the composition and performance of indexes are less volatile and can help investors weather the market turbulence more than a portfolio of individual stocks.

High-quality dividend stocks, such as dividend kings that have increased payouts at least once a year for at least 50 straight years, are also less volatile than other kinds of stocks, according to investment advisers.

Market experts further note that indebted businesses typically do poorly during recessions. As a result, many investors will avoid corporations that carry large debt loads since they are vulnerable to a rising-rate environment.

Christine Benz, the director of personal finance and retirement planning for Morningstar, says investors should consider companies that specialize in consumer staples (food, beverages, and household goods), explaining that they are terrific stocks to own in any type of economy.

“Also, pharmaceuticals makers tend to fare well in such an environment. Utilities would tend to fare pretty well,” she added.

At the same time, even value stocks will face some bruising in the recession selloff, says Ipek Ozkardeskaya, a senior market analyst at Swissquote Bank. That said, value stocks can “better weather the selling pressure” than their alternatives since investors like the cash they have on their balance sheets, rather than expectations of future revenue.

“To me, the best pick is the quality pick, and we can easily throw some tech companies into that mix, including names like Apple, Microsoft, and Google,” she told The Epoch Times.

Fixed-Income Could Be Great Again

With yields on the rise, returning to core bonds could be a worthwhile strategy for investors. This is becoming increasingly notable, too.

Despite being battered at record levels this year, investors are pouring into the bond market again because of the growing normalization of yields.

Many market experts contend that it’s important to develop a hedge should equity markets continue to slide if growth prospects diminish heading into 2023. Investment strategists think bonds could appear to be more attractive once again, as traders attempt to seek shelter from the red ink flooding the U.S. stock market.

Indeed, the benchmark 10-year U.S. Treasury yield is hovering around 3 percent.

Capital Group, a financial services firm, also championed fixed-income investments.

“Fixed income investments can provide an essential measure of stability and capital preservation, especially when stock markets are volatile,” the investment management firm said.

What About Commodities?

The commodities market has been on a tear this year, with energy and agriculture prices soaring.

So far this year, natural gas is up 130 percent, crude oil is up about 40 percent, soybean 20 percent, wheat 55 percent, corn 32 percent, and even orange juice, which had been paralyzed for years due to falling demand and citrus psyllid, has risen nearly 15 percent.

But stocks that specialize in these sectors could witness some softer earnings, Ozkardeskaya warned.

Gold bullion bars are pictured after being inspected and polished at the ABC Refinery in Sydney on Aug. 5, 2020. David Gray/AFP via Getty Images

“Energy and commodity stocks could see their earnings soften from the latest quarters, if high prices hit the global demand, and jeopardize revenues,” she said.

Mining stocks have also come under pressure in recent months, mainly due to growth worries and the slump in metal prices.

Copper has tumbled nearly 4 percent, silver has lost more than 6 percent, and gold is barely trading in positive territory.

This corner of the market could also come under pressure from a strengthening greenback. The U.S. Dollar Index (DXY), which gauges the greenback against a basket of currencies, has surged about 7 percent year-to-date. A stronger buck is typically bad for dollar-denominated commodities because it makes it more expensive for foreign investors to purchase.

Many market analysts think that the DXY has more room for growth because of the Federal Reserve’s tightening campaign and investors trying to seek shelter in traditional safe-haven assets.

Additionally, investments such as gold are generally sensitive to a rising-rate environment, since it lifts the opportunity cost of holding non-yielding bullion. Opportunity cost rises because they get increased competition from higher-yielding investments.

Wall Street, Main Street Talking Recession

Recession talk is heating up on Wall Street, with some of the top banks, CEOs, and economists forecasting an economic downturn sometime over the next 12 to 24 months.

The Wells Fargo Investment Institute has made a mild recession its base case scenario for the end of 2022 and the beginning of 2023. The bank’s research division projected a 1.3 percent contraction for three quarters, which would be lower than the 10 percent decline in 2020 and the 3.8 percent drop in 2008 and 2009.

Deutsche Bank thinks a recession is on the horizon for 2023, anticipating that it “will be worse than expected.” Morgan Stanley has set the odds of a downturn to 27 percent in the next 12 months.

“We will get a major recession,” Deutsche Bank economists wrote in a report to clients on May 17.

A monthly survey of Bloomberg economists raised the probability of a recession within the next year to 30 percent in May, up from 27.5 percent in April. A Conference Board study of American CEOs revealed that most anticipate a recession. A second-quarter CNBC|SurveyMonkey Small Business Survey discovered that 80 percent of small-business owners are penciling in a recession this year.

People shop for groceries at a supermarket in Glendale, Calif., on Jan. 12, 2022. Robyn Beck/AFP/Getty Images

But Goldman Sachs strategists, led by David Kostin, contend that “a recession is not inevitable,” noting that investors are pricing in more substantial odds of a recession than are presently ubiquitous in a broad array of economic data.

“Rotations within the U.S. equity market indicate that investors are pricing elevated odds of a downturn compared with the strength of recent economic data,” the bank’s strategists stated in a recent research note.

However, according to Desmond Lachman, a senior fellow at the American Enterprise Institute, there are “many signs” spotlighting that a “deeper-than-normal recession” is in the works.

“Among the reasons to fear a deeper-than-normal recession is that monetary-policy tightening is causing the equity and credit market bubbles to burst,” he wrote, adding that turbulence in financial markets, inflation, and a decrease in household wealth would add to economic pressures.

Schulman believes that if a recession does happen, it will be the strangest one the United States has ever seen.

“If the U.S. has a recession soon, it could be a most unusual recession with plentiful credit, low unemployment, and high inflation—significant factors not normally associated with an economic slowdown—that could disrupt normal cash flows and industry preferences.”