As of 2022, the United States had gone well over a decade without a recession. Given this long period of economic growth and stability, many investors have become unfamiliar with the right financial steps to take during a recession. Other investors have never experienced a recession as an adult and have no expertise with trading under these conditions.

With the Federal Reserve raising interest rates to fight inflation and economic activity slowing, now is the right time to familiarize (or re-familiarize) yourself with the most effective strategies for investing during a recession and protecting your assets.

First, let’s explore what we mean by recession.

What is a Recession?

A recession is a significant and extended economic downturn. Historically, recessions have been declared after a national economy experiences two consecutive quarters of decline in Gross Domestic Product, which is a measure of all economic activity.

Some of the common features of a recession include:

  • Job losses
  • Bear stock markets
  • Reduced consumer spending
  • Lower corporate profitability
  • High interest rates or high inflation (or both)

Historically, recessions generally last about a year, although they may last as little as six month or extend across multiple years.

How to Prepare When a Recession is Coming

There are a few tactics investors can use to shore up their financial positions when a recession is coming. These include:

  • Reducing their overall spending, especially on non-essentials or big ticket items.
  • Put money in inflation-protected US Treasury bonds.
  • Increase the size of their rainy day fund. This provides a cushion for emergencies.
  • Update their resume and refresh relationships within their professional network (recessions often mean job losses).
  • Adapt their investment strategy to minimize risk and capture upside created by recessionary conditions.

Is it Safe to Keep Investments During a Recession?

Yes. Sharp declines in stock prices occurring during a crisis or recession may lead to good investment opportunities. High-quality companies may be available at discounted valuations. Other companies may have inflation-resistant business models.

Investors should ensure that they maintain control over their emotions during recessionary periods or bear markets. Just as greed can lead traders to make suboptimal decisions chasing upside, fear, panic or uncertainty can lead them to make ill-advised decisions in a misguided effort to protect themselves from risk.

This often manifests in short-term thinking about markets. It’s critical to understand that recessions and bear markets are part of cycles. Eventually, economic growth returns, new bull markets are born, and the investors who maintained a dispassionate perspective and practiced disciplined trading are often even more well-positioned for the future. RJO Futures offers a futures trading demo account that allows traders to easily view market activity, place orders, and track orders and positions.

Investment Strategies During a Recession

The key to smart investing during a recession is understanding how markets tend to act during these periods and adapting your strategy to take advantage of these tendencies.

For example, investors often pursue a “flight to quality” strategy during bear markets, exiting positions in more speculative assets and reinvesting in blue chip stocks. Investors who can execute defensive moves early in a down market, then shift to a more aggressive posture as the recovery begins, are often able to emerge from recessions or bear markets much stronger.

One example: Many sectors, such as consumer staples, healthcare or utilities, tend to perform better than average during recessions. Some investors hide in these sectors then quickly pivot to growth assets once  economic conditions become more favorable.

Dividend stocks are also a popular way to invest during recession periods because their dividends can help offset dips in the price of the underlying stock. Strong companies with reliably high dividends should be a focus of most investors during recessions.

Finally, companies with strong growth stories, good fundamentals and solid financials often bottom out during recessions or bear markets. Taking positions in these companies (or the companies in which you have the most conviction) during macro downturns is one of the best ways to build a successful long-term portfolio.

How RJO Futures Can Guide You During a Recession

Learning how to invest during a recession in the most optimal fashion is a fundamental aspect of being a long-term investor.

At RJO Futures, our skilled professional staff have the necessary domain expertise and experience to help guide you every step of the way.

In addition to providing a calm and steady voice to rely on, RJO Futures can also provide you with an advanced trading platform, and suite of trading tools, that is unparalleled in the market.

If you’d like to know more about how to maximize your investments in any market, don’t hesitate to contact RJO Futures today.