When the market is soaring, it’s easy to forget that what goes up can also come down. But economic slowdowns tend to be cyclical, which means that another recession is in the future. Whether it’s fast-approaching or still a ways off, it’s wise to prepare for its eventuality. This way, you won’t join the panicking stampede out of stocks and into cash. Instead, you’ll remember that stocks can perform well even during a recession – you just need to know which ones. A financial advisor can help you build an investing plan with a recession in mind.
1. Seek Out Core Sector Stocks
During a recession, you might be inclined to give up on stocks, but experts say it’s best not to flee equities completely. When the rest of the economy is on shaky ground, there are often a handful of sectors that continue to forge ahead and provide investors with steady returns.
If you want to insulate yourself during a recession partly with stocks, consider investing in the healthcare, utilities and consumer goods sectors. People are still going to spend money on medical care, household items, electricity and food, regardless of the state of the economy. As a result, these stocks tend to do well during busts (and underperform during booms).
2. Focus on Reliable Dividend Stocks
Investing in dividend stocks can be a great way to generate passive income. When you’re comparing dividend stocks, some experts say it’s a good idea to look for companies with low debt-to-equity ratios and strong balance sheets. If you don’t know where to start, you may want to look into dividend aristocrats. These are companies that have increased their dividend payouts for at least 25 consecutive years.
3. Consider Buying Real Estate
The 2008 housing market collapse was a nightmare for many homeowners. However, it turned out to be a boon for some real estate investors. When a recession hits and home values drop, it may be a buying opportunity for investment properties. If you can rent out a property to a reliable tenant, you’ll have a steady stream of income while you ride out the recession. Once real estate values start to rise again, you can sell at a profit.
4. Purchase Precious Metal Investments
Precious metals, like gold and silver, tend to perform well during market slowdowns. But since the demand for these kinds of commodities often increases during recessions, their prices usually go up, too. You can invest in precious metals in a few different ways. The most straightforward route is buying coins or bars from a seller or coin dealer. While this is different than buying a security, it’s technically as good as any other option.
If you’re more interested in buying precious metal securities, turn your attention to ETFs. These funds are collections of investments within a single industry, which, in this case, is the precious metal market. You could also purchase a gold IRA if you’re saving specifically for retirement.
5. “Invest” in Yourself
If you lose your job and income during a recession, you can rebound by “investing in yourself.” You could go back to school to gain additional knowledge or skills that could help you get a better job.
Paying down debt is another option if you worry that your job situation might go south at some point. The less money you have to spend on bills, the less stressed you’ll feel during an economic crisis.
What Does a Recession Entail?
A recession marks a significant slowdown in economic activity, often following periods of growth or economic expansion. While the causes of recessions can vary, they typically stem from a combination of factors such as rising inflation, geopolitical tensions, reduced consumer spending or financial market disruptions.
The National Bureau of Economic Research (NBER), the official authority on U.S. recessions, defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
Unlike the commonly referenced definition of two consecutive quarters of negative GDP growth, the NBER takes a broader view, considering a variety of economic indicators, including personal income (excluding government benefits), employment levels, industrial production and wholesale-retail sales. This comprehensive approach provides a more nuanced assessment of when a recession begins and ends.
The most recent official U.S. recession, triggered by the COVID-19 pandemic, occurred in early 2020 and was unprecedentedly short due to aggressive government interventions and recovery efforts. However, not all recessions are alike. Some are relatively mild, like the early 2000s dot-com bust, while others, such as the Great Recession of 2007-2009, have far-reaching and prolonged impacts.
Key Characteristics
- Job Loss and Rising Unemployment: One of the most immediate and visible effects of a recession is a decline in employment. Businesses often respond to declining revenues and reduced consumer demand by cutting jobs or freezing hiring. As unemployment rises, households face financial strain, leading to a reduction in spending—a key driver of economic growth.
- Decline in Industrial Production: Companies scale back manufacturing and production to align with lower consumer and business demand. This often results in reduced factory utilization, supply chain disruptions, and slower innovation.
- Reduced Consumer and Business Spending: Economic uncertainty during a recession prompts consumers to save more and spend less, while businesses may delay investments in new projects or expansions. This cyclical reduction in spending can exacerbate the downturn.
- Financial Market Volatility: Stock markets typically experience increased volatility during recessions as investors react to negative economic news and declining corporate profits. Some sectors, like technology or discretionary goods, may suffer more, while others, like healthcare or utilities, tend to be more resilient.
- Inflation or Deflation: Depending on the root causes of the recession, prices may either rise (inflation) or fall (deflation). For instance, a supply-side shock can lead to inflation, while widespread demand destruction might result in deflation, further complicating recovery efforts.
Long-Term Impacts and Recovery
The effects of a recession can linger even after the economy starts to recover. Businesses may take time to rebuild confidence and rehire workers, while households may continue to prioritize saving over spending. Policymakers often play a critical role in mitigating the damage through fiscal stimulus, monetary easing or targeted interventions aimed at stabilizing markets and supporting economic growth.
Although recessions are challenging, they also serve as a reset for overheated economies, correcting imbalances and laying the groundwork for future growth. For individuals, businesses and investors, understanding the dynamics of a recession can help mitigate risks and identify opportunities during periods of economic uncertainty.
Are We Currently in a Recession?
Although the term “recession” is thrown around quite a bit, its actual definition comes from the National Bureau of Economic Research or NBER. According to its website, the NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” Thus, the NBER is the official institution that determines if the country has actually entered a recession.
As of December 2024, the NBER does not consider the U.S. to be in the midst of a recession. The last recession, which occurred in early 2020 during the early days of the Covid-19 pandemic. The NBER identifies recessions using a myriad of factors that involve analysis across a wide range of sectors within economic markets. It also accounts for citizen-level data points, like unemployment and personal income.
Bottom Line
Preparing for a recession doesn’t mean abandoning investments or making drastic financial decisions out of fear. Instead, it involves strategic planning and selecting assets that tend to perform well during economic downturns, such as core sector stocks, reliable dividend stocks, real estate and precious metals. Diversifying your approach, while also focusing on self-improvement and financial security, can help you weather market volatility more confidently. With thoughtful preparation, you can put yourself in position to navigate slowdowns and take advantage of opportunities as the economy recovers.
Investing Tips
- If you’re unsure of how to build a portfolio that accounts for a recession, a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A recession has the potential to bring serious losses. That’s why any investing plan starts with understanding how much risk you can tolerate. SmartAsset’s asset allocation calculator considers your risk tolerance to guide you to the optimal portfolio.
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