Key points
- Recessions are periods of widespread economic downturn.
- Cash, large-cap stocks and gold can be good investments during a recession.
- Stocks that tend to fluctuate with the economy and cryptocurrencies can be unstable during a recession.
In a recession, assets like stocks often tumble as people stop spending, employees lose jobs and companies pull back on investing.
The uncertainty of a recession can lead many investors to consider getting out of the game altogether. They might see the stock market start to drop and panic-sell to cut their losses. But many people don’t realize that decision simply locks in those losses.
Rather than selling off investments that underperform during a recession, a better idea might be to further diversify your portfolio with assets that tend to hold up during a market downturn.
What’s a recession? And are we in one?
A recession is a widespread economic downturn that typically lasts more than a few months.
As the economy slows, businesses have less of a need to make goods and provide services, resulting in layoffs or hiring freezes. People who are out of work typically rein in spending, slowing the economy further — and there’s your recession.
To identify a recession, experts commonly look at the country’s gross domestic product, or GDP, which is the value of goods and services produced there. Two consecutive quarters of negative growth is often considered a recession.
As of July 2023, the U.S. does not meet this criteria for a recession. Real GDP increased in both the first and second quarters of 2023. Unemployment also remains low at 3.6% as of June 2023, and inflation is returning to pre-pandemic norms.
National Economic Council Director Lael Brainard said at the latest Economic Club of New York on Bidenomics, “Despite repeated forecasts that recession is just around the corner, the U.S. recovery is solid.”
That said, it’s hard to predict when a recession might come. But it can help to make sure your finances are in order in case the economy takes a turn.
What does ‘recession-proof’ mean?
“Recession-proof” is used to define something that is not strongly impacted by the effects of a recession. While often used to describe jobs, the term can also apply to investments in certain companies, sectors and industries that prove more resilient during times of economic hardship.
Examples of recession-proof assets
Recession-proof assets can be as specific as certain companies or as broad as entire asset classes or industries. Examples include:
- Companies with stable cash flow and pricing power, such as Walmart.
- Industries with stable demand, such as utilities, consumer staples and health care.
- Commodities like gold.
What are the best assets to hold in a recession?
It’s possible your investment portfolio will take a hit during a recession. However, you can mitigate your losses by holding certain assets in your portfolio.
Cash
Cash is an important asset when it comes to a recession. After all, if you do end up in a situation where you need to pull from your assets, it helps to have a dedicated emergency fund to fall back on, especially if you experience a layoff.
In general, an emergency fund should cover at least three to six months’ worth of living expenses, including:
- Rent.
- Utilities.
- Food.
- Medications.
- Minimum debt payments.
This way, if you do need to dip into your emergency fund, you can allow your other investments to ride out market lows and capitalize on long-term growth. Ideally, you’ll keep your emergency fund in a high-yield savings account insured by the Federal Deposit Insurance Corp.
Large-cap stocks
Stocks of large, well-run companies that are highly valued tend to perform best during recessions, according to Ariel Acuña, founder of LTG Capital, an investment advisor and wealth management firm in Newton, Massachusetts.
“Companies that make products that consumers buy regardless of the economic environment — think diapers and utilities — do quite well because individuals continue buying them,” Acuña says.
These types of stocks might focus on:
- Food.
- Personal care products.
- Health care.
- Utilities.
“People need to eat, brush their teeth, go to the doctor and heat their homes whether the economy is strong or weak,” says Robert R. Johnson, a chartered financial analyst and finance professor at Creighton University’s Heider College of Business. “That doesn’t mean individuals won’t change their spending patterns within a sector. For instance, with a weaker economy, they may shift from steak to hamburger or from shopping at Nordstroms to shopping at Walmart.”
Gold
Historically, during times of recession, the value of gold has sometimes increased. For example, in 1973 and 1974, the stock market fell 17.37% and 29.72%, respectively. But during those same years, the price of gold increased 73.49% and 67.04%. Similar trends can be seen in 2002 and 2008.
This trend isn’t universal but has held true in many stock market downturns over the years. So gold can be a sensible investment during times of economic turmoil.
“During recessions, when paper assets like stocks and bonds are depressed, companies and employees feel the pressure, and they tend to run to the safety of gold, which explains its surge,” says Joseph Sherman, CEO of Gold Alliance, a precious metals supplier. “Gold is really a bet against the dollar. And during recessions, when faith in the Federal Reserve is low, people will tend to put their faith in non-fiat currencies that are not backed by what they perceive as failing central bankers and governments.”
A basic introduction: How to invest in gold
What to avoid holding during a recession?
Just as there are assets that could help you weather the storm of a recession, there are others that might make the storm worse. Here are a few assets you may want to avoid during an economic downturn.
Cyclical firm stocks
On the other side of the stock coin are companies that tend to fluctuate alongside the economy. Johnson describes them as “firms whose profits are strongly correlated to the overall economy,” which “tend to perform well when the economy is thriving.” So when the economy takes a dive, these stocks tend to follow that trend.
Sectors for these types of firms include:
- Construction.
- Manufacturing.
- Travel.
- Leisure.
“Companies that make discretionary products or services tend to suffer in a recession because they may be the first things consumers cut back on,” Acuña says.
Cryptocurrency
Cryptocurrency is a digital currency, an alternative form of payment created using encryption technologies. Cryptocurrencies function both as currencies and as virtual accounting systems. Examples include bitcoin and ethereum.
Cryptocurrencies are generally unregulated, uninsured and difficult to convert into real cash. They can also be extremely volatile. After all, the past two years have seen bitcoin prices reach highs of more than $60,000 and lows of less than $16,000. As you can imagine, it’s probably not a place you want to put your money when the economy is already on shaky ground.
“There is no more speculative asset class today than cryptocurrencies,” Johnson says. “The rise of cryptocurrencies during the coronavirus pandemic was fueled by unprecedented amounts of liquidity infused into the financial markets by the Federal Reserve. So my belief is that one of the worst asset classes to hold during a recession are the highly speculative cryptocurrencies like bitcoin and ethereum.”
An important note about investing during recessions
It can be tempting to overhaul your investing strategy or even move out of the stock market completely if you feel like a recession is imminent. But doing so can translate to significant losses. So it’s important to maintain a long-term perspective.
“All market setbacks are temporary because the market, in its almost 200-year history, always has gone on to higher highs,” Acuña says. “Rather than being scared out of participating in a weak or declining market resulting from a recession, accumulators should view lower prices as opportunities to buy assets at prices they may never see again.”
Talking to a qualified financial professional, like a certified financial planner, can help you build a well-balanced, diverse investment strategy that can weather a recession.
Frequently asked questions (FAQs)
Diversification can help lessen the blow of financial losses during a recession. Different asset classes — and even assets within classes — perform differently during various phases of the economic cycle. At a time when stocks are down, bonds might perform better. Similarly, while some stock sectors are often hit particularly hard during a recession, others tend to experience less volatility.
In other words, diversification helps limit your losses in any one part of your portfolio. And depending on the circ*mstances of the recession, you might even notice that some of your assets still see positive growth.
Your investment portfolio probably isn’t the only thing you’re concerned with during a recession. Many people lose their jobs during economic downturns. You may know people who have lost their jobs and fear losing yours. One of the most important steps to prepare for a recession is to have a healthy emergency fund.
An emergency fund can help replace your income during a season of unemployment. It also can help you avoid going into debt or dipping into your investments or retirement accounts to pay your bills until things turn around.
A depression is generally viewed as a more severe form of a recession. While recessions can be as short as a few months and are marked by unemployment and lower income and spending, depressions last much longer and involve more widespread unemployment and major reductions in economic activity.
When looking for profitable investments during recessions, it’s important to remember that you don’t gain or lose anything on most investments until you sell them. As long as you continue to hold your stock, any changes in its value are only paper gains or losses.
That said, bonds can provide both capital appreciation through price changes and regular income, which is realized when received. Bonds tend to outperform stocks during economic downturns. However, when a recession ends, holding too many bonds instead of stocks can cause you to be left behind when stocks rebound.
This is why the best recession investment strategy is to stick to your original investment strategy. It’s advisable to avoid making changes to your portfolio due to external events, even ones as severe as a recession, provided you have time to weather the market’s ups and downs by having enough cash on hand to cover your daily living expenses until the economy rebounds.
