How to Invest During a Recession

Since America shook hands with the Industrial Revolution in the 19th century, despite short term fluctuations, the overall economic trend has been onward and upward. Those usually temporary dips in growth we call recessions, are a normal albeit unpleasant part of an economy’s lifecycle. 

There are many psychological, economic, and financial factors that catalyze a recession. Therefore, it’s not possible to predict when the economy is going to reach its peak and begin its descent. While many people may be reluctant to invest during a recession, the sophisticated investor realizes the abundance of two things: volatility and opportunity. 

There are many ways to thoughtfully invest during a recession. The aforementioned sophisticated investor will first analyze which sectors typically perform well - and which sectors typically take a dive - during a recession before making any financial decisions. 

Sectors that Perform Well During a Recession 

The overall economic decline doesn’t mean that every industry is performing poorly, however. In fact, these five sectors that have historically performed well during a recession. 

1. Discount stores like WalMart and Dollar General typically do well during a recession because as consumers’ income goes down, they choose to spend their money where their dollars will go further.  

2. Consumer staples will always be in high demand during an economic decline, such as canned goods, laundry detergent, toothpaste, and more, particularly during the COVID-19 pandemic when many stores and restaurants have had to close their doors. 

3. Accounting services are usually safe during a recession; as businesses try to cut costs and reallocate finances, they aren’t likely to get rid of the person who knows the numbers. And despite the economic condition, we all still need our taxes done every year. 

4. Healthcare has been expanding for the past decade. As an inelastic industry, its upward trend continues even during recessions, especially now as more and more people of the Boomer generation approach retirement. However, with this recession being caused by a global pandemic, the healthcare industry is in turmoil. 

5. Alcoholic Beverages typically fare well during a recession. Thought people typically buy less expensive beverages, they buy more of them. 

Sectors that Decline During a Recession 

On the other hand, there are indeed discretionary industries the sophisticated investor will avoid during a recession. The following are five sectors that have historically declined during a recession. 

1. Entertainment, everything from movie cinemas to restaurants, sports arenas, concerts, and more suffers during an economic recession as people have less expendable income. 

2. Homegoods and furniture stores experience a decline in sales as consumers are choosing to make less frivolous or simply aesthetic purchases. 

3. Construction projects tend to halt, which has a domino effect on the entire industry, including lumber, concrete, and other materials.  

4. Travel accommodations and hotels do drastically less business as people can no longer afford to or are forbidden to travel.  

5. Automobile Industry experiences a massive dropoff in sales as consumers cannot shell out a lot of cash or take on debt for large ticket toys. 

Looking at Investments through a Long Term Lens 

With investments, it’s important to always look at the bigger picture - especially if you’re considering investing during a recession. Independent investors can benefit immensely from partnering with a private equity firm who is able to look at the landscape with a long term lens and make calculated decisions based on analytics, trends, and overall knowledge of the investments. 

Take AscendTek, LLC, for example. While Borgman Capital realizes now may not be most people’s idea of an ideal time to invest in wireless cell tower construction, they can also project, based on their knowledge and experience, that the recession will result in pent-up demand for communications services, triggering the need to build more wireless cell towers. After all, the recession doesn’t mean 5G isn’t going to happen. Its deployment is only slowed.

A good private equity partner recognizes that, despite short term recessions, the economy will ultimately continue to grow. Having a long term viewpoint is key to being able to thoughtfully invest in companies like AscendTek, LLC and others that are sure to take off when the economy begins to rise again. 

An Outlook on our Current Situation 

Another key learning from past recessions is that the residual effects are different for every recession. In 2001, the year of the dotcom bubble and September 11 attack, we began to scrutinize business models in the tech industry more deeply before investing, and security services became far more important. Another example is the Great Recession of 2008, after which  the banking system changed and people became more conservative with their finances. 

To parallel our current situation, there are effects of recession brought on by COVID-19 that will outlast COVID-19. Many people are speculating what the “new normal” is, investors among them. Part of our challenge as investors is to think of potential consequences and how society will restructure itself for the longer term so we can continue to make smart calculations and seek out opportunities. 

If you’re an investor searching for opportunities, contact the Borgman Capital team today. 

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