How to Invest in the Stock Market During a Recession

The S&P 500 usually decreases significantly during recessions; it fell to 55% during the Great Recession. The index often starts to fall long before a recession begins and recovers long before the recession ends. This historical pattern gives investors reason to be optimistic about the current market crash. During a recession, stock prices tend to plummet.

Markets can be volatile and stock prices fluctuate sharply. Investors react quickly to any hint of news, whether good or bad, and fleeing to safety can cause some investors to take their money out of the stock market entirely. In addition, investors become more risk-averse and are less likely to invest in stocks, causing stock prices to fall during a recession. Clearly, the real challenge for the Federal Reserve is to find a balance between interest rate hikes and unemployment.

During a recession, dividends are especially important because they help cushion even if the stock price falls. In addition, stocks like Merck and AbbVie, with high and reliable payments, offer good competition for bonds that many investors flee to in difficult times. Merck's performance exceeds that of a 10-year Treasury. It is an independent publisher and comparison service, not an investment advisor.

Your articles, interactive tools and other content are provided to you free of charge, as self-help tools and for informational purposes only. They are not intended to provide investment advice. NerdWallet does not and cannot guarantee the accuracy or applicability of any information with respect to your individual circumstances. The examples are hypothetical, and we recommend that you seek personalized advice from qualified professionals regarding specific investment issues.

Our estimates are based on past market performance, and past performance does not guarantee future performance. Many or all of the products listed here are from our partners who compensate us. This can influence the products we write about and where and how the product appears on a page. However, this does not influence our evaluations.

Recession alarms have been ringing lately, due to a sharp rise in inflation and interest rates, and an equally sharp decline in the stock market. And while investing in a recession can be scary, it doesn't have to be disconcerting if you know what to look for. Minimize the risk of an investment falling in price during market volatility? Create a source of fixed income? Investing in the stock market while prices are low (also known as buying the fall)? Creating a portfolio that incorporates all of these strategies may be ideal, but successfully tackling any of them could have a significant positive impact on your financial future. Take a look at the following considerations to help you make a plan that's right for you.

For long-term investors, a market crash may simply mean that stocks and other investments are for sale. If you're not already investing, you can take advantage of one of our options to get the best investment accounts. During a recession, some sectors of the economy tend to outperform others as consumer needs change. Delia Fernandez, a certified financial planner and owner of Fernandez Financial Advisory in Los Alamitos, California, says both the healthcare and consumer commodities sectors are examples of this.

The health sector includes biotech and pharmaceutical companies while the consumer commodities sector includes food and beverages, household and personal products, and even alcohol and tobacco. These sectors don't usually experience the rapid growth that others might see in the recovery phase of a recession. So how do you identify those companies? One of the best places to start is to use a free stock evaluator. If you already have a brokerage account, it will most likely be available on the broker's website.

This is how you'll find individual stocks that have performed better than the overall market. First, you'll need to determine the performance of a broad market index such as the S&P 500 over a specific period. To find stocks that performed better this year, define the price-performance filter in your stock evaluator to show any value higher than the performance of last year's S&P 500. If you have the opportunity to filter by security type select “common stock” to make things simple.

This is where you can enter the consumer commodities or health care sectors mentioned above (or any other you want to consult). You can also choose to filter out stocks with positive dividend growth as consistently increasing dividends can be a sign of financial strength and discipline which could help companies weather recessions better than others. Keep in mind that this filter will limit your options but it should present some of the more established companies that could better withstand difficult market conditions. Investing in funds such as exchange-traded funds (ETFs) or low-cost index funds is generally less risky than investing in individual stocks which could be especially attractive during a recession as investing in funds allows you to be exposed to specific baskets of stock rather than just one single investment (such as an individual stock).

In times of recession this is a way to invest in several companies in the most resilient sectors while avoiding concentrating risk on one company only.

Willis Pankiw
Willis Pankiw

Passionate social media specialist. Certified social media guru. Unapologetic bacon fanatic. Passionate tv trailblazer. Hardcore twitter trailblazer.