Business News

How to Invest During a Recession  

Distressed Patriotic Flag Unisex T-Shirt - Celebrate Comfort and Country $11.29 USD Get it here>>


The U.S. economy fell into a technical recession following back-to-back quarters of negative GDP growth in the first half of 2022 as rampant and broad-based price inflation affected businesses and consumers.

Looking ahead to 2023, economists and market analysts agree that the country will begin to see the real pain of an economic downturn. While experts can debate the size and scope of an economic contraction, how can households and investors shield themselves from the storm clouds? This is what the typical person wants to know.  

Defensive Sectors and Dividend Investing

First, what sectors should be on your radar?

This past spring, Goldman Sachs released its recession manual to help prepare clients for a downturn. The document noted that in the five recessions since 1981, the top four sectors have been consumer staples, energy, health care, and utilities.

Meanwhile, higher interest rates have made high-yield savings accounts, money market funds, and certificates of deposit (CDs) more attractive. However, with the real interest rate (inflation-adjusted) still negative, it might not be enough to protect families’ net worth.

This is where dividend investing comes into play, as it can generate passive income.

A dividend is the distribution of a company’s earnings to shareholders that is paid out monthly or quarterly. For example, PepsiCo’s annual dividend yield is 2.66 percent, meaning it pays investors $1.15 per share every three months.

There are several types of dividend stocks in the U.S. stock market, including dividend aristocrats and dividend kings. The former are businesses that have raised their dividend payouts for a minimum of 25 straight years (Exxon Mobil, Target Corp., or Walmart). The latter are companies belonging to the S&P 500 that have increased their dividends for at least 50 years (3M, Coca-Cola, or Procter & Gamble).  

“Dividend growth stocks tend to be of higher quality than those of the broader market in terms of earnings quality and leverage,” wrote S&P Global analysts in a paper (pdf). “Quite simply, when a company is reliably able to boost its dividend for years or even decades, this may suggest it has a certain amount of financial strength and discipline.”  

The New York Stock Exchange in New York
The New York Stock Exchange in New York on June 29, 2022. (Julia Nikhinson/AP Photo)

The Name’s Bonds, I-Bonds  

In today’s inflationary environment, one of the most popular investment tools has been inflation-protected bonds, or I-Bonds. The other popular vehicle is Treasury Inflation-Protected Securities (TIPS).

As everyone explores tools to take cover from 40-year high inflation, investors have been utilizing these two types of bonds to their advantage. TIPS became attractive when it started delivering a 9.62 percent interest rate in May.

They became popular since no other bond investment offered such high-interest rates. When investors factor in volatility and uncertainty, it becomes “a no-brainer,” according to Mel Lindauer, founder and former president of the John C. Bogle Center for Financial Literacy.

But what is the difference between an I-Bond and TIPS?

TIPS’ principal sum is adjusted to integrate the current inflation rate. I-Bonds are given an adjustment to their interest rates to reflect inflation. Meanwhile, payments are correlated to the CPI. If inflation rises, bonds linked to the CPI will increase payments to holders. If the CPI declines, payments will also fall.

Investors can open a Treasury Direct account and purchase a maximum of $10,000 per year. Or they can acquire bond funds in the open market, such as Fidelity’s Inflation-Protected Bond Index Fund (FIPDX) or Vanguard’s Inflation-Protected Securities Fund Investor Shares (VIPSX).

Is the US Dollar Still King? 

The U.S. Dollar Index (DXY), which measures the greenback against a basket of currencies, has been on a tear in 2022, rallying about 14 percent to around 109.00.

The greenback’s strength has been buoyed by rising demand for conventional safe-haven assets. Global investors have been fleeing to the buck in response to the Federal Reserve’s tightening campaign, volatility in the equities arena, and weakness in other major currencies (euro, yen, or loonie).

Epoch Times Photo
U.S. dollar banknotes in front of a displayed stock graph. (Dado Ruvic/Reuters)

Is it too late for investors to dive in, or is there more room for growth? Market experts anticipate an elevated U.S. dollar for some time, particularly if the global economy slips into a recession and the Fed becomes more aggressive.

There are several dollar-related funds, with the most popular vehicle being the Invesco DB US Dollar Index Bullish Fund (UUP). 

Does Gold Still Glitter?

Gold has been the premier safe-haven asset during times of chaos. But why has the yellow metal tumbled about 6 percent to under $1,800 in an inflationary climate and slowing economy? 

There have been two main reasons: a surging U.S. dollar and rising Treasury yields. 

A stronger buck is bearish for dollar-denominated commodities like gold because it makes it more expensive for foreign investors to purchase. In addition, gold is typically sensitive in a rising-rate economy because it lifts the opportunity cost of holding non-yielding bullion.

But the precious metal could be resurrected should the Fed reverse course and cut rates in response to a sharp economic downturn. 

ETFs for Recessions  

Since the beginning of the coronavirus pandemic, exchange-traded funds (ETFs) have exploded in popularity for both passive and active investors. They have been around for more than three decades, but ETF demand has spiked amid tax advantages, lower costs, and thematic investing. On an international scale, the value of assets managed by ETFs is more than $10 trillion.

While there is an ETF for nearly everything in the global economy, are there any ETFs to weather a recession storm? Market experts typically recommend ETFs that specialize in dividend appreciation companies, consumer staples, food, and low volatility.

Here are some of the most popular ETFs that invest in these areas: Vanguard Dividend Appreciation Index Fund ETF Shares (VIG), iShares U.S. Consumer Staples ETF (IYK), First Trust Nasdaq Food & Beverage ETF (FTXG), and Invesco S&P 500 Low Volatility ETF (SPLV).

Updating Investment Strategies  

Investment experts contend that one of the best methods to employ is to update trading styles.

A common investing tactic is dollar-cost averaging (DCA). This is when investors regularly purchase shares of stocks or ETFs in about the same amounts. By engaging in this practice, retail investors can avoid buying at all-time highs, prevent themselves from trying to time the market, and eventually lower the average share price.  

Another simple measure is diversification.

During the 2020-2021 market euphoria phase, investors poured into tech stocks, be it Alphabet or Netflix. This might have worked in an easy-money environment, but a tightening climate requires diversification. So, an updated portfolio in a recession could include exposure to real estate investment trusts (REITs), commodities, index funds, emerging markets, and bonds.

At the same time, it is crucial not to over-extend a portfolio, becoming almost unmanageable for average investors.

In addition, many seasoned and novice traders make either one of two mistakes: timing a bottom or panic selling. Both are risky bets, especially for long-term investors, since they might lose out on enormous gains. Market strategists assert that recessions and bear markets are the best periods to build positions to achieve long-term goals.

“Historically, there are way more positive years in the investment markets than there are negative years,” M. Tyler Ozanne, the principal and senior financial advisor with Probity Advisors, told Bankrate.com. “In a recession, and corresponding negative market environment, it is good to remember that better investment days are probably ahead.”

Andrew Moran

Follow

Andrew Moran covers business, economics, and finance. He has been a writer and reporter for more than a decade in Toronto, with bylines on Liberty Nation, Digital Journal, and Career Addict. He is also the author of “The War on Cash.”



Source link

TruthUSA

I'm TruthUSA, the author behind TruthUSA News Hub located at https://truthusa.us/. With our One Story at a Time," my aim is to provide you with unbiased and comprehensive news coverage. I dive deep into the latest happenings in the US and global events, and bring you objective stories sourced from reputable sources. My goal is to keep you informed and enlightened, ensuring you have access to the truth. Stay tuned to TruthUSA News Hub to discover the reality behind the headlines and gain a well-rounded perspective on the world.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.