Now might be the time for investors to review how resilient their portfolio would be to a U.S. recession and the steps they should take. For investors who might want to be more defensive with their holdings, here are seven investments to consider.
Signs of a possible slowing global economy and the potential impact that it could have in the U.S. has some investors concerned about the next recession.
The U.S. economy hasn’t been in a recession since the last one ended in 2009.
While most economists don’t see that happening in the near future, “it will happen sooner or later,” says Richard Mathes, president of The Mathes Company in New York.
Now might be the time for investors to review how resilient their portfolio would be to a U.S. recession and the steps they should take. For investors who might want to be more defensive with their holdings, here are seven investments to consider.
Cash
Jim Paulsen, chief investment strategist at Minneapolis-based The Leuthold Group, says while investors shouldn’t load up heavily in cash, increasing their cash holdings to slightly above their normal allocations in a recession can be a smart idea. Recessions can generate a lot of worry, so having a strategic amount cash on hand gives investors the ability to buy favored stocks quickly that have fallen sharply in price. “You want to take advantage of other people’s fears,” he says.
(Getty Images/iStockphoto/Dmytro Synelnychenko)
Getty Images/iStockphoto/Dmytro Synelnychenko
U.S. Treasury bonds
Credit markets can be riskier in a recession, so Paulsen recommends investors stick with the high-quality bonds, such as U.S. Treasury bonds. Historically, Treasury bonds have been the best-performing asset in recessionary environments because investors see these assets as a safe haven, he says. Bonds will also give greater returns than all-cash positions, he says. Look to extend duration, too, which means buying longer dated bonds. Many bond benchmarks have a duration around five to six years. For that reason, Paulsen says to look to buy bonds that have a longer maturity window during negative economic environments.
(AP Photo/Peter Morgan, File)
AP Photo/Peter Morgan, File
High-quality dividend stocks
Investors shouldn’t divest from the stock market during recessions; instead, Paulsen says they should look to buy high-quality companies. These types of companies generally have a high return on equity, pay high dividends and aren’t subject to market cycles. “These dividends act as a life jacket,” he says. Pharmaceutical stocks are a very defensive, high-dividend subsector of health care. For a broad-based play, there are several exchange-traded funds based on high-quality dividend stocks, such as ProShares S&P 500 Dividend Aristocrats ETF (ticker: NOBL) or SPDR S&P Dividend ETF (SDY).
(Getty Images/iStockphoto/ipopba)
Getty Images/iStockphoto/ipopba
Preferred stock
Mathes says his firm likes preferred stock when the economy is in a rough patch. Preferred stocks are a hybrid, having both equity and debt components. These securities often have stable prices and pay decent dividends, he says. The preferred market isn’t always very liquid, which is a drawback. He recommends these for people who want to invest smaller amounts. He also advises investors to avoid weaker companies that sometimes lure shareholders with outsized dividend yields. The Mathes Company likes preferred stock from banks, which are usually solid companies. “When you’re going into something like a preferred you want safety and income,” he says.
(AP/Richard Drew)
AP/Richard Drew
Emerging markets
Morley Campbell, president and chief investment officer at Irving, Texas-based Continuous Capital, says in a recession, long-term holdings should still be focused for growth, with some exposure outside the U.S. He picks emerging markets for the younger demographics and faster gross domestic product growth rates, which won’t change through recessions. “That tailwind persists,” he says. Compared with long-term U.S. market valuations, emerging markets remain cheap. “Lower valuation means higher return expectations,” he says. The price-earnings ratio for the MSCI Emerging Markets Index, which captures large- and mid-cap representations across 24 emerging market countries, was 12.7 at the end of January.
(AP/Vincent Yu)
AP/Vincent Yu
Commodities
Commodities are often uncorrelated to stocks, and a small allocation to a diversified commodities ETF, such as Invesco DB Commodity Index Tracking (DBC), can add portfolio diversification, Paulsen says. Rising prices usually cause recessions, and this inflationary effect can support real assets like commodities while hurting stocks. Commodities may also fall, but not as much as stocks. An investor’s commodities allocation shouldn’t be more than about 5 percent of the total portfolio, unless the investor has some other strategic reason to have bigger holdings, he says.
(AP/Marc Israel Sellem)
AP/Marc Israel Sellem
Diversified assets
Most investors’ tendencies during recessions are to scale back risk, but Robert Bacarella, president of investment advisory firm Monetta Financial Services in the Chicago area, says investors need to stay diversified and think long term. A portfolio asset mix should be based on an investor’s risk tolerance, not whether markets rise or fall, he says. The time in the market, not market timing helps people reach their financial goals. “In the investment ocean, a recession is a wave that will eventually pass or that can be surfed on,” he says. “It is not a reason to get out of the water.”
(Getty Images/iStockphoto/William_Potter)
