January 28, 2023

Should You Buy Stocks During a Recession?

By DENNIS BLACK on Jan 15, 2023

You might be wondering whether you should buy stocks during a recession. There are a few key factors you should keep in mind when considering whether to buy or not. First, you need to be sure that you can weather the recession. If you are unable to do so, then you should consider investing in other assets instead. Also, be aware that there are several kinds of stocks, such as value and cyclical, that are more recession-proof than others.

Large-Cap Stocks Tend to Be More Stable During Volatility

Large-cap stocks are stocks that are widely recognized and have a large market capitalization. This is determined by multiplying the total number of shares by the current stock price.

Stocks with a higher market cap have a higher level of stability and predictability. They also offer a greater opportunity for growth. But they are also more risky investments.

Small caps have a lower market capitalization, so they are generally considered more volatile. They tend to be less liquid than larger-cap stocks, which means they may have a harder time raising money. And they have a narrower focus, often in a single line of business. Consequently, they are more sensitive to recessions and other economic downturns.

Large-cap stocks, on the other hand, are usually well-established, mature companies. Their financials are often solid, and their dividends are regularly growing. In addition, they have a solid track record of performance. However, despite the better reputation of large caps, they may not be a suitable investment for stable appreciation. For this reason, many investors use defensive stocks. If you are a risk-adverse investor, you may prefer to invest in small-caps.

It's important to note that the relationship between company size and risk is a critical component of a long-term investing strategy. Both large-cap and small-cap stocks have a place in a diversified portfolio. Yet, investors should always do their own research before deciding.

During a recession, defensive stocks tend to outperform. Moreover, a blend approach can help hedge against the volatility of large caps. Many people blame the Federal Reserve for recent weakness in the equity market. This has left large-cap valuation metrics well below three-year averages.

Value Stocks Are Recession-Proof

When you're investing during a recession, you might be thinking about buying value stocks. These stocks are usually less expensive than their more high-flying technology counterparts.

However, it isn't as simple as putting together a portfolio. You need to do your homework, and you need to have a financial advisor on your side. The market can be volatile, but it is still possible to make some money. Value stocks are often small companies with low-priced shares. They tend to do better in recessions.

Some of the best companies in this category include Walmart and Target. Both have a long track record of making it through any economic downturn. In the second half of the recession, small value stocks outperformed the broader market by a large margin. It is worth noting that these stocks have outperformed by about a tenth of a percentage point per month during the first half of the expansion.

The best way to invest in value stocks is to find those with a strong dividend. This means paying a dividend yield of at least two percent. Moreover, the company needs to have sustained positive cash flows to sustain its pay-out. During a recession, consumers tend to spend less, which puts pressure on businesses. If the economy turns around, these companies will reap the rewards.

Recession-proof industries include utilities, which are government-protected and do not change during a recession. Electricity and gas companies can generate healthy margins and provide a stable source of income for investors. Healthcare is a great sector to consider during a recession. There are many consumer staples, including food and beverages, that tend to be resistant to recessions. Likewise, pharmaceutical companies and healthcare providers are also good options.

Avoid High-Risk Assets

When buying stocks during a recession, it is important to understand that you should avoid investments that are extremely risky. Instead, invest in investments that can help you during a downturn.

Some of the most important assets to avoid include speculative stocks, high-yield bonds, and highly leveraged corporations. These are usually expensive because of investor confidence, and they will likely fall faster during a recession.

It is also important to diversify your portfolio. For example, you can purchase a fund that focuses on several companies that are resilient in tough economic times. You can also choose to keep part of your portfolio in cash. This is a good short-term investment, but if the market rises, you could be trapped in cash. If you are not sure which investment options are best for you during a recession, a free stock screener can be helpful. You can find these screens on many brokerage sites.

The financial markets tend to experience repeated patterns of troughs and peaks. These patterns do not necessarily provide any clear indication of future events, but they can be useful for determining which investments to choose.

Investing during a recession may seem frightening, but it can be a great time to buy. In fact, all recessions eventually come to an end. Buying a recession-proof stock like Procter & Gamble, Walmart, or Johnson & Johnson during a downturn can be a sound way to generate wealth.

Another strategy to consider is dollar-cost averaging. This method involves investing equal amounts of money at regular intervals. That way, you are more likely to buy more shares at a lower price when prices are declining and fewer shares at a higher price when they are rising.

Investing in Funds Is Less Risky Than Investing in Individual Stocks

Investing during a recession may seem risky, but it can be a worthwhile investment. In fact, you may even be able to make money. Unlike investing in stocks, investing in funds is often less volatile and safer.

During a recession, investors tend to move towards bonds and other fixed income investments. This is a smart move because it minimizes the risk of a market crash. However, it can be difficult to know which investments are right for you.

You can also invest in index funds, or stock funds, which are funds that include a broad array of different securities. These types of investments are typically more stable than single stock investments, and they can provide higher returns over the long term. While you may be afraid to take on risks, remember that every recession has ended. That's why it's important to keep a positive attitude while you're investing.

Although it's true that there are companies that have performed well in the past, they can't guarantee future results. Even the best-performing investments can drop in value. Instead, stick with solid, established businesses that have a track record for profitability and low debt.

There are several things you can do to reduce your risk and make the most of your money during a recession. First, make sure you have three to six months of living expenses in your emergency savings account.

Secondly, continue to make regular contributions to your long-term accounts. You should never stop contributing during a crisis. Lastly, consider buying a dividend-paying stock. Having an ongoing source of income can help you get through a recession and help you build your savings.