The trade war shows signs of becoming long term and it is taking its first bite out of Chinese manufacturing. Many economists are predicting a global recession in the coming year and in this interconnected world the USA will not be immune. The question is how to protect your investments from a recession.
How to Protect Your Investments from a Recession
The first choice in protecting your investing capital is to convert to cash or cash equivalents such as we mentioned in our article about how to invest without losing any money. US bank accounts are protected by Federal Deposit Insurance and both US Treasuries and Grade AAA or AA corporate bonds are safe bets. You will have to do with a lower rate of return than in a surging stock market. But, considering that the market will fall during a recession, this is a good way to preserve investment capital until the market stabilizes.
If you are going to stay invested in the stock market you need to look carefully at the intrinsic stock value of each of your investments. For a long term investor committed to staying in the market, the concern is not if your stock falls by twenty percent in the coming year bur rather if it stays there instead of resuming its growth in the years that follow.
Long Term Investment Trends and Concerns
The Western markets were spooked this morning after Asian markets fell due to reports of a significant Chinese manufacturing slowdown. Markets tend to ingest such info and jump up and down. The underlying concern is that China’s growth will, in fact slow down. The USA does not sell all that much to China so a Chinese recession on the face of it would not be a problem for the USA. But, China has a huge manufacturing sector that draws raw materials from all across the world. The slowdown of Chinese manufacturing will affect emerging markets in every corner of the world. That, in turn, will reduce demand of US products in these markets as there will be less money to spend and less credit to help with purchases.
China has had a spectacular rise over the last forty years or so. Its rise has been comparable to that of the USA after the US Civil War and into the 20th Century. Or, taking an Asian example or two, China’s rise has been comparable to that of Japan, Taiwan, or South Korea after the Second World War. All of these economies came to a point where they needed to liberalize central control to keep growing. It may not be possible for the Chinese Communist Party to do this and retain control. The downside for China is its huge and increasing debt and we only need to think of Japan around 1990 to realize how that might turn out.
Over the long term China will not be able to grow at the rate it had been and will not be able to keep taking on debt to fuel its expansion. As such, any investment linked to the China manufacturing miracle is likely to slow down or even reverse.
US Debt Burden
The Trump tax cuts provided a nice boost to the US economy. However, that stimulus is running out and in the end has simply added to the mounting US national debt. We recently asked how will higher interest rates affect your investments. Considering that the USA will likely need to pay higher interest rates over the long term to finance a mounting national debt, this is good question to consider.
The USA is in dire need to infrastructure investments which may or may not come to be. The backbone of US transportation is the composite of US railroads, highways, airports, bridges, waterways, and ports. If these are not kept up the US economy will suffer over the long term and any investments needing these facilities will suffer.
With an increasing amount of available money going to pay off the national debt there will be less available for investment in any and all business and financial endeavors.
What Investments Will Continue to Grow in a Prolonged Recession?
Investopedia writes about investment portfolio strategy in a recession.
Recessions are characterized by faltering confidence on the part of consumers and businesses, weakening employment, falling real incomes, and weakening sales and production-not exactly the environment that would lead to higher stock prices or a sunny outlook on stocks.
As they relate to the market, recessions tend to lead to heightened risk aversion on the part of investors and a subsequent flight to safety. On the bright side, however, recessions predictably give way to recoveries sooner or later.
We commonly suggest an assessment of intrinsic stock value for picking, holding, or selling stocks. This is especially true when recession looms. The best and safest companies to invest in during a recession are those that have weathered many before. Companies with decades in business, strong balance sheets, and a history of paying dividends year in and year out including during recessions are good picks. Low debt, products that sell in good times and bad, and healthy dividends are all how to protect your investments from a recession.
Years ago we wrote about investing in beer. It is true that in bad times we drink beer to drown our sorrows and in good times we lift a glass, or two, of beer to celebrate. Likewise, households use dish soap, shampoo, laundry soap, and other necessities in good times and bad. Pharmaceutical companies typically survive economic slumps and companies with highly diversified product lines like Johnson & Johnson will be around after the next recession has come and gone. And McDonalds will be selling hamburgers forever.
Growth during a Recession
Not all companies need to hunker down and tighten their belts during a recession. There will always be companies in biotech or other tech areas that develop a new product or service and grow substantially while the rest of the economy is shrinking. If you have the insights and skills to pick such investments they should represent a small part of your portfolio even during the darkest days of a recession.