How to trade during a recession

A recession is a period of slow economic growth. It’s recognised technically as a period of two consecutive quarters of negative growth in real gross domestic product (GDP).

Equity markets will generally take a hit during this time. You can often see its effect in reduced household and business expenditure, reduced demand for debt, and a rise in unemployment.

Equity markets tend to decline rapidly during a recession. Currencies are volatile, commodity prices fluctuate, and the investor sentiment is low.

Most investors and companies tend to be risk averse. Investors will pivot from riskier assets—think cryptocurrencies and Information Technology—to safer ones as such as bonds, gold and consumer staples. This sees risk asset prices drop and performance rise for asset classes with lower but stable returns, having less reliance on economic cycles.

Sectors resistant to a recession

• Healthcare
• Consumer staples (food, beverage, household goods)
• Utilities

Sectors vulnerable to a recession

• Technology
• Financials
• Consumer discretionary (apparel, leisure, automotive)

Diversifying your portfolio is one way to stay in the green as markets fluctuate over time. Spread your risk across a variety of share types for the best chance to navigate bumpy markets successfully.

Defensive stocks

These tend to weather economic cycles well because they resist the changes in consumer demand that comes with a recession. You’ll find them in industries considered “necessary” in any economic event, offering goods and services we always need. They offer stability and consistent dividends with low capital growth.

Blue chip stocks

Blue chip stocks have generally seen it all in terms of economic cycles. They hail from large corporations that are well-established, financially stable and market leading.

They often have dependable earnings with solid financials and stability including consistent dividends. They’re considered a low-risk/highly reliable option for investors.

Growth stocks

These are shares with significant growth potential. Investors generally buy them for capital growth, not dividends. Growth stocks typically don’t pay dividends to investors as they reinvest their profits back into company development.

Growth stocks tend not to fare well during a recession because they strongly rely on high product demand from consumers and estimated future cash flows.

Cyclical stocks

Cyclical stocks are sensitive to economic change. They tend to dip in value during a recession due to reduced consumer demand, but they also offer an opportunity to buy undervalued stocks. That’s because investors will often look to sell these stocks during a recession, out of fear or profit taking, providing an opportunity for new investors to enter these markets.

What not to do in a recession

Predict the bottom. Nobody knows when the market will pivot. Don’t get caught trying to time the market with fear of missing out. Time in the market is more important than timing the market.

Panic sell. Don’t let your emotions take control of investing decisions. Keep the general economic cycle in mind and the reasons behind your initial investment. Consider all your options, have confidence/conviction in your research and let the company ride the economic wave.

Get caught in the white noise. It’s not uncommon for investors to turn to short-term speculation for quick profits. If you’re considering trading short-term price movements during a recession, ensure it suits your personal financial goals and you’re set with a strategy and understanding of the risks involved.