What investments should you buy in a recession?

Investing
December 19, 2018

It goes without saying, the ideal time to buy investments is when they’re at a low point, and selling them when they’ve increased in value. ​

Some investors do this by watching a country’s economic cycle.

If you’re clever, you can identify the stage of the ​economic cycle you’re in, and purchase your investments in the economic cycle that they’re most likely to ​​be lower in value.

Here's an explanation of some of the terms used when a market is trending down and which industries to consider (or avoid) buying investments in.

A slowdown occurs when the rate of growth decelerates – but national output is still rising. If the economy grows without falling into recession, this is called a soft-landing.

A dip is any brief downturn from a sustained longer-term uptrend. For example, the market may go up 5%, then go down 2% over a few days or weeks.

A crash is a sudden and very sharp drop in stock prices, often on a single day or week. You may have heard of the 1929 crash when the market lost 23% over a two-day period and 48% in less than two months, instigating the Great Depression. In total it lost around 89% of its value. Alternatively you may have heard of Black Monday, in October 1987, when stocks plunged 23% in a single day (the worst decline ever) or the Global Financial Crisis (GFC) of 2008, in which the market dropped 21% in a week.

A correction is often defined as a 10% drop in the market from recent highs. In the last four corrections since the GFC, the average decline was 15.3% over three and a half months.

A recession is a fall in real Gross Domestic Product (GDP) for two consecutive quarters (six months). Some key indicators are:

  • ‍rising unemployment and fewer job vacancies available for people looking for work
  • ‍a rise in the number of business failures and businesses announcing lower profits and investment
  • ‍a decline in consumer and business confidence
  • ‍a contraction in consumer spending & a rise in the percentage of income saved
  • ‍large price discounts offered by businesses in a bid to sell their excess stocks
  • heavy de-stocking as businesses look to cut back when demand is weak – causes lower output, and / or
  • ‍government tax revenues are falling and welfare benefit spending is rising.

What's the difference between a recession and a depression?​

  • ‍a slump or a depression is a prolonged and deep recession leading to a significant fall in output and average living standards
  • a depression is where real GDP falls by more than 10% from the peak of the cycle to the trough, and / or
  • ‍an example of a country that has suffered a depression in recent years is Greece. National output has fallen in six successive years and real GDP is more than 25% lower than at the peak of the cycle.

A bear market is a long, sustained decline in the stock market. Once losses surpass 20% from the market’s most recent high, it’s considered to be a bear market. The standard definition of a bear market is a decline in stocks of 20% or more. According to research by BAML, there have been 25 bear markets since 1929 where the market fell by 20% or more without a subsequent 20% rally. On average, the bear market lasted 10 months and the broader averages fell around 35% with a frequency of occurring once every 3.4 years. Bear markets tend to be longer still. In the three bear markets since 1987, the average decline has been 46.5% over 1.4 years.

What's the best industries to invest in during this time?

If you start seeing the signs of an economic slowdown, look at the defensive-oriented sectors — those in which company's revenues are supported by selling products which people are less likely to cut back on during a recession.

Industries would include consumer staples, utilities, telecommunication services, and health care. So products you might consider would be toothpaste, electricity, phone service, and prescription drugs.

Historically, these sectors have performed well during a recession.

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