Increasing interest rates, soaring inflation and a sliding stock market have many people convinced a recession is on the way.
The Federal Reserve in July agreed to raise the federal funds rate to a range of 2.25 – 2.5 percent, marking the fourth consecutive rate hike since March of this year. U.S. inflation hit a 40-year high in 2022 amid soaring demand, an already-strained global supply chain and Russia’s invasion of Ukraine.
Additionally, the S&P 500 suffered its worst start to a year since 1970, entering a bear market on June 13, 2022 after falling over 20 percent from its Jan. 3, 2022 high, further strengthening the sentiment that recession is likely.
In the event a recession does hit, here are some investments you should consider avoiding.
What investments should you avoid during a recession?
Recessions can be tricky to predict, and even trickier to navigate. Investments you might traditionally think of as safe might in fact expose you to more risk depending on the economic environment.
Your first instinct might be to let go of all your stocks and move into bonds, but high-yield bonds can become particularly risky in the event of a recession.
High-yield bonds, with credit ratings below investment grade, are riskier than government debt securities, and are highly susceptible to market downturns. The issuing companies are often smaller, indebted and of overall lower quality, and in times of market uncertainty can be more likely to run into trouble.
Stocks of highly-leveraged companies
Companies carrying high levels of debt on their balance sheets should be avoided during a recession. The price of a highly indebted company is more likely to fall during a recession. If a company struggles to pay back its debts due to decreased demand and overall economic slowdown, its stock price can fall quickly.
Although indebted companies can tumble in a recession and present investment opportunities later on, a defensive investor should stay away while the company faces clear business challenges that must be overcome.
Consumer discretionary companies
Consumer discretionary stocks are popular during boom times, but their goods and services fall outside of everyday essentials like utilities and healthcare. Well-known consumer discretionary companies include Tesla and Nike.
This sector can be particularly susceptible to recessionary pressures, as the economy slows and people start spending less. Consumer discretionary companies move more dramatically with consumer sentiment and economic cycles, which can worsen in times of financial uncertainty.
Other speculative assets
Speculative assets are high-risk, high-reward investments such as penny stocks or emerging market stocks. Penny stocks are small companies whose stocks trade for very low prices. They’re not typically listed on major …….