What to trade and invest in during the so-called recession?
While the global economy is not currently in recession, financial markets worldwide are showing signs of one coming. A recession usually means that the stock markets are in decline, accompanied by increased volatility. However, there are ways that can help market participants during a recession. Much of it is about understanding how the market behaves.
One of the key trends that traders can look out for is that broader markets, as measured by indices like the S&P 500 and FTSE 100, tend to drop more sharply before a recession than during it. Defensive sectors such as utilities and consumer goods tend to perform better during such periods, while technology and finance do not. Traders should also pay attention to economic policy in order to gather information about how long a recession can last and what can be profited from during it.
What is the situation in America?
US GDP has been shrinking for two consecutive quarters, but the Fed and US presidential administrations say that this is not yet a recession, although the media and traders do not think so. The unemployment rate in the US, according to the latest data, remains low at 3.6%, the business activity index (PMI), which is formed on the basis of the results of questionnaires filled out by purchasing managers, is above 50, consumer demand is not declining and was +1.1% in June.
At the same time, the regulator increases the key rate quite quickly, not justifying analysts’ forecasts. Since January, it has grown 10 times from 0.25% to 2.5%. Even at the beginning of the week, the consensus was 3.75% (+1.75%) until the end of the year, but now the Fed officials say it is worth mortgaging about 4%. That is, if at the next meeting the rate is again raised by 0.75%, then the Fed will be able to raise the rate by 0.25% one or two more times and this will complete the entire tightening cycle.
How have companies responded to similar situations in the past?
The stock market wins back the recession in America before it reaches its maximum. But companies from different countries and sectors do it differently. If you look at sectoral indices over the past 20 years, you can see the main leaders and outsiders.
In a recession, demand is reduced, but everyday things continue to be bought. Manufacturers of essential goods, such as food or household chemicals, are doing well. Similarly, retailers who offer low prices are holding on. When there are problems in the economy, and inflation is enormous, people look for where it is cheaper.
Utilities are a traditional defensive sector. Electricity and water are always needed, and prices are regulated, which will ensure stable income at any time.
Traders can also look at the dividend aristocrats when the payouts smooth out the decline in stocks: if the price has fallen, the dividend remains.
A recession also benefits companies that help distract from problems. These are producers of alcohol and tobacco, sweets, and video games. This also includes online cinemas and fast food. Traders and investors need a “safe haven”, so such stocks will be actively bought in a recession.
Top 3 destinations that outperform the market during recessions:
– production of basic goods
– oil and gas energy
Top 3 directions where it is better to leave during an active recession:
– communications (including IT services)
How can traders make the most of this period?
There are many potential options for traders to make the most of a recessionary market. Depending on how long the recession lasts, market participants may use several different trading strategies.
For example, go short: short-term trading can get the most out of a recessive market by selling stocks ahead of time. Through analysis, a market participant can make the most of the sharp downturn, especially in sectors that are expected to lag, such as technology and real estate.
Also, make a plan after a recession: the market won’t stay that way for long, so look for strategies to make the most of the post-recession market growth.
In addition, don’t forget about hedging: a trader can use both long and short positions to manage the market.
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