We’ve already established equities often do poorly during recession, but trying to time the market by selling off your entire portfolio usually has consequences. Should you as an investors do nothing? Certainly not.
To prepare, investors should take the opportunity to review their overall asset allocation, which may have changed significantly during the bull market, to ensure their portfolio is balanced and diversified. Consulting with a fiduciary financial adviser can help immensely since these can be emotional decisions for investors.
Not all stocks respond the same during periods of economic stress. In the 10 largest equity declines between 1987 and 2022, some sectors held up more consistently than others - usually those with higher dividends such as consumer staples and utilities. Dividends can offer steady return potential when stock prices are broadly declining.
Growth oriented stocks can still have a place in the portfolio, but investors may want to consider companies with strong balance sheet, consistent cash flows and long growth runways that can withstand short-term volatility.
Even in recession, many companies remain profitable. Focus on specific companies with products and service people will continue to use every day such as telecom, utilities and food manufacturers with pricing power while maintaining broad diversification.
How should you position your bond portfolio for a recession?
- Stay calm and keep a long term prospective
- Maintain a balanced and properly diversified portfolio
- Consider balancing equity portfolios with a mix of dividend-paying companies and growth focused stocks
- Choose investments with a strong history of weathering market declines
- Use high quality fixed income to help offset market volatility
- Speak with a fiduciary financial adviser to game plan your goals
Guide to Recessions: Key Takeaways—
- Recessions are a natural and necessary part of every business cycle-
They occur when economic output declines after a period of growth.
- Recessions have been infrequent-
The U.S. has been in official recession for less than 15% of all months since 1950.
- Recession have been relatively short-
Recessions have ranged from 2 months to 18 months, with the average lasting about 10 months.
- Recessions have been less impactful compared with expansions-
The average recession leads to a contraction of 2.5% in GDP. Expansions grow the economy about 25% on average.
- An inverted yield curve has preceded each of the last eight recession by an average of 14.5 months-
It’s one of the most consistent signs that a slowing economy has reached its tipping point.
- Equities have typically peaked seven months before the economic cycle-
They also often rebound before a recession officially ends
- Some Equity sectors have held up better than others during severe declines-
Consumer staples topped the S&P 500 index during each of the last 10 major market declines
- A core bond portfolio can provide stability during recessions-
When stock markets decline sharply, high-quality bonds have shown resilience.