How to Invest in the Stock Market During a Recession

Recession alarms have been ringing lately due to inflation & interest rates & sharp decline in stock market but investing during recession doesn't have to be disconcerting if you know what strategies & considerations to look for.

How to Invest in the Stock Market During a Recession

Recession alarms have been ringing lately, due to a sharp rise in inflation and interest rates, and an equally sharp decline in the stock market. But investing during a recession doesn't have to be disconcerting if you know what to look for. During the recession phase of the business cycle, income and employment decline; stock prices fall as companies struggle to maintain profitability. A sign that the economy has entered the lowest phase of the economic cycle is when stock prices rise after a significant decline.

If you want to make good use of a market correction during a recession, try not to buy more stocks than you would buy in better times. If your risk tolerance allows you to accept a moderate asset allocation of 65% of stocks and 35% of bonds, you must maintain that goal, no matter what the market does. During a recession, dividends are especially important because they help cushion even if the stock price falls. In addition, stocks like Merck and AbbVie, with high and reliable payments, offer good competition for bonds that many investors flee to in difficult times. Merck's performance exceeds that of a 10-year Treasury.

It is an independent publisher and comparison service, not an investment advisor. Your articles, interactive tools and other content are provided to you free of charge, as self-help tools and for informational purposes only. They are not intended to provide investment advice. NerdWallet does not and cannot guarantee the accuracy or applicability of any information with respect to your individual circumstances. The examples are hypothetical, and we recommend that you seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance does not guarantee future performance.

Many or all of the products listed here are from our partners who compensate us. This can influence the products we write about and where and how the product appears on a page. However, this does not influence our evaluations. If you're not already investing, you can take advantage of one of our options to get the best investment accounts. During a recession, some sectors of the economy tend to outperform others as consumer needs change.

Delia Fernandez, a certified financial planner and owner of Fernandez Financial Advisory in Los Alamitos, California, says both the healthcare and consumer commodities sectors are examples of this. The health sector includes biotech and pharmaceutical companies while the consumer commodities sector includes food and beverages, household and personal products, and even alcohol and tobacco. These sectors don't usually experience the rapid growth that others, such as consumer discretion (household goods and services considered more wants than needs, such as clothing, restaurants and luxury goods) or information technology, might see in the recovery and recovery phase of a recession. So how do you identify those companies? One of the best places to start is to use a free stock evaluator. If you already have a brokerage account, it will most likely be available on the broker's website. This is how you'll find individual stocks that have performed better than the overall market.

First, you'll need to determine the performance of a broad market index, such as the S&P 500, over a specific period. To find stocks that performed better this year, define the price-performance filter in your stock evaluator to show any value higher than the performance of last year's S&P 500. If you have the opportunity to filter by security type, select “common stock” to make things simple. This is where you can enter the consumer commodities or health care sectors mentioned above (or any other you want to consult). You can also choose to filter out stocks with positive dividend growth.

Consistently increasing dividends can be a sign of financial strength and discipline, healthy balance sheets and consistent cash flow, all factors that can help companies weather recessions. Keep in mind that this filter will limit your options to dividend stocks only, but it should present some of the more established companies that could better withstand difficult market conditions. This doesn't mean that these companies are always going to be strong in a recession. Always keep in mind that past performance does not guarantee future results. But these are data points that could inform your potential selections. Investing in funds, such as exchange-traded funds and low-cost index funds, is generally less risky than investing in individual stocks, which could be especially attractive during a recession.

Investing in funds allows you to be exposed to specific baskets of stock, rather than to a single investment (such as an individual stock). In times of recession, this is a way to invest in several companies in the most resilient sectors and at the same time avoid concentrating risk on a single company. If one company in the fund performs poorly, the good results of other companies may offset the losses of the underperforming company. For example, if you wanted to invest only in consumer commodity companies, you could look for shares in Vanguard's Consumer Staples ETF or Consumer Staples' Sector Select SPDR Fund. For long-term investors, a market crash may simply mean that stocks and other investments are for sale at discounted prices. Minimize risk? Create fixed income? Investing while prices are low? Creating a portfolio that incorporates all these strategies may be ideal but successfully tackling any one could have a significant positive impact on your financial future. Take a look at these considerations when making an investment plan that's right for you: identify stocks with better performance than overall market; consider sectors like healthcare or consumer commodities; use free stock evaluator; filter out stocks with positive dividend growth; invest in funds like ETFs or index funds; remember past performance doesn't guarantee future results. These strategies can help investors make informed decisions when investing during recessions so they can take advantage of discounted prices while minimizing risk.

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