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Codete Blog

Navigating Economic Cycles for Better Investing

Michal Krzysztof v2 a28a1397a9

31/01/2023 |

7 min read

Michał Krzysztof

In times of sustained economic growth, everything seems easy, and investors tend to be optimistic, while the best investment in a recession may be a little harder to find. Moving money to „safe havens” to avoid market risk in tough times of economic uncertainty is just one of the options available.

Whatever the industry you represent, and no matter how well you’re doing now, you should get ready for a major change, which may be a rapid one. And the change will come, inevitably, as economic cycles – fluctuations between periods of growth and recession – are an immanent part of the market economy.

However, entrepreneurs and economists alike never know when exactly the expansion phase is going to end, and some signs of the upcoming downturn may even be ignored. For this reason, it’s good to always be prepared for an economic crisis, with plan B and a safety net in place at all times.

To get off to a great start, it’s simply good to know what safe investments in a recession are. Because when the economic crisis hits and affects investors’ resources, there’s no time for hasty moves that can make things even worse.

So how to invest when a recession hits? Is it reasonable to invest during a recession at all? And what is an economic investment? Read on to find out.

Table of contents:

1. Economic cycles in a nutshell

2. Tips & tricks for recession investors

3. How to invest during a recession – key takeaways

Economic cycles in a nutshell

We’ve all heard about stock market crashes, but you don’t have to invest in equities to get affected by economic downturns badly. Everyone can be harmed by the higher unemployment rate, lower wages, inflation, rise in poverty, corporate investment cuts, or even companies going out of business.

How often do recessions happen? That’s a good and difficult question, and, unfortunately, the answer won’t get us closer to the precise timeline of future economic crises. Interestingly, particular downturns don’t have to be years apart, as each of the four stages a crisis is divided into can last as short as months as it was in the case of the peak-to-peak cycle in the U.S. within the years 1981-1982.

The four stages of the economic cycle

The investment cycle chart encompasses four phases:

  • Expansion – with growing demand, increasing production, and, as a result, also increasing employment
  • Peak – the economy’s maximum rate of growth; a rise in prices and production costs
  • Recession – falling consumer spending, investors moving to „safe havens”
  • Trough – slowly moving business activity from contraction to recovery

These economic cycle stages – reflecting fluctuations in economic activity – repeat, following the same pattern, over and over again. And where are we now? Well, in the year 2023, global economy prospects are rather poor – it may be entering a decade of low growth, with the International Monetary Fund projecting global GDP growth going down from 6% in 2021 to 2.7% in 2023.

So, what do we do now?

Tips & tricks for recession investors

The overall market volatility that often accompanies the economic crisis can be very tricky for investors, including stock market ones. As things may change dramatically overnight, it’s hard to make reasonable decisions quickly. Sometimes, a lot can be gained lightning-fast, but way more often, fortunes are lost. What to do, then? Here are some pieces of practical advice for recession investors to consider. 

Thinking long-term and keeping calm

It’s true that investors often don’t have sufficient data to make informed decisions. They do want to be well-informed, though, but tend to overreact and any piece of information can make them overly happy and excited, or down and depressed. And being scared or emotionally unstable is definitely not the right psychological state to deal with big money in.

Of course, you can buy some stocks cheaply when markets sell off (aka value investing) and panicking investors get rid of their papers. But even if you buy low, you may still not be patient enough to wait for the right moment to sell high, and also miss out on gains. Strong nerves are a must when making economic investments of any kind, and stock market ones in particular.

However, stocks (or equities) are just one type of asset to invest in, along with bonds, commodities, cryptocurrencies, hedge funds, real estate property, or alternative investments. A long-term portfolio of any investor should be a diversified portfolio – that’s a golden rule to be applied not only for recession investing.

Choosing defensive stocks and safe havens

During a financial crisis and the market sell-off, investment returns go down, but particular assets or sectors may be more or less affected. The latter, called defensive stocks, include businesses representing industries such as healthcare, utilities, and consumer staples, as, most probably, they will still be up and running even in hard times.

What’s more, when the market is in turmoil, investors often turn to assets they see as the least risky – „safe havens”. These are assets that don’t lose value during an economic recession but tend to retain or even increase it – such as gold, certain currencies (like the U.S. dollar or Swiss franc), or cash.

The thing is that the asset may be a good investment during an economic downturn but fails to bring good results when the economy is blooming. When times of uncertainty end and the market sentiment improves, investors start looking for more risky and potentially more beneficial assets... and everything starts over again.

Betting on the right sectors

And what to invest in in the new business cycle? Well, according to Encyclopædia Britannica, sectors that tend to outperform in particular economic cycles cover:

  • Expansion: IT, financials, communications, consumer discretionary
  • Peak: financials, energy, and materials
  • Contraction: health care, consumer staples, utilities
  • Recovery: real estate, industrials

Apart from encompassing healthcare sector companies, a recession-proof portfolio can also cover some of the best companies offering advanced technological solutions. A good investing strategy, especially for turbulent times, may simply mean investing in innovation, including IT investing in a recession.

Investing in (and with) technologies

Investing in innovation through a crisis can have a very beneficial influence on a company, indeed. The companies that decided to do so outperformed their non-innovative peers during the recovery phase, as historical data, gathered and analyzed by McKinsey & Company, showed.

On top of that, the crisis itself and the necessity to cut costs or keep the clients may trigger a very intense – and very fruitful – brainstorming phase. The bottom line of testing out creative ideas on how to do things better, develop innovative products, or improve the existing ones to be more attractive for clients in new economic circumstances may be a product line or a new habit that will stay with the company for good.

Of course, to reach the consumer during a recession, you need to try harder. To make it easier, more precise, and more efficient, using technologies that offer insights into customer information, like a strong CRM, as well as new sales tools and techniques, is highly recommended.

How to invest during a recession – key takeaways

An economic downturn is something inevitable in the market economy. It’s hard to say exactly when it will hit again as gaps between particular recessions are very irregular. Market volatility, bringing quick and unpredictable changes in the prices of a security or an index, may be one of its signs.

A well-balanced portfolio, diversified in terms of asset types and sectors represented, can be treated as insurance against some of the economic shocks and their bad consequences. Being well-informed and keeping track of economic research may help you avoid the worst thing you can do during any downturn – starting to panic. Keeping cash reserves and an emergency fund might help, too.

Wise and far-sighted investing during a recession often means following a reasonable investing plan – with longer-term investments and a further horizon taken into account. That’s because, when the economic downturn is over, the sun is going to rise again.

If you need IT consulting services to help you get ready for a market downturn and create an efficient recession investment strategy, or simply invest in IT, contact Codete now.

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Michal Krzysztof v2 a28a1397a9

Michał Krzysztof

Sales Director at Codete

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