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Worried About a Recession? How to Protect Your Portfolio

Jon Brown Jon Brown, Stockhouse
1 Comment| September 3, 2019

Markets were sharply in the red on Tuesday as the escalating trade war between the US and China continues to take its toll, pushing the Dow more than 400 points lower. The United States appears as if it is talking itself into another recession and stocks are bouncing like a rollercoaster. Any investor who survived the financial crisis of 2008 to the “Great Recession” until 2013 will tell you that excess money was hard enough to come by.

Looking at that last major recession from just over a decade ago, there is a likelihood that history may repeat itself in some ways, but through this line of thought, options emerge for an investor to attempt brace themselves.

Lessons learned from the 2008 recession:

Consumer spending grew. Despite having less money to go around, some stocks gained substantial ground during the last recession and it is clear what the ties are that bind them.

Discount stores and major chains like Walmart (WMT) surged during that time, as well as drug producers like Amgen (AMGN). Mega beer stocks like Anheuser Busch (BUD) , brewers of the popular (and cheap) Budweiser beer also increased substantially, as did fast food, like McDonald's Corp. (MCD).

Consumer spending has also been on the rise lately throughout the US / China trade dispute and has been one of the key defences against recession fears eroding Wall Street markets even further.

A lot has changed since 2008. A substantial portion of retail sales have moved online, craft and small beer brewers have been dominating their market, healthier food options have become immensely popular, while McDonalds franchises underwent a “classier” makeover. The key connection is that the most popular key staples will likely survive, maybe even thrive despite how little money people are clinging to.

What to look out for:

The Financial Post recently quoted Alex Bellefeur, chief economist at Mackenzie Investments, in an article who noted that if the US and China were to escalate their trade war and raise their tariffs by even more billions on either side, it would be bad news for Canada. Being the biggest trade partner to the world’s largest economy, Canada is a small, but open economy that doesn’t have the benefit of an enormous consumer market like the United States.

The advice here is to also watch the Bank of Canada’s motions on interest rate hikes, while keeping an eye on the fall federal election and its implications for the energy sector. Canada has been struggling with resource developments and investors have been looking to diversify their portfolio through other assets in other countries.

Investors should also keep an eye on bond markets, as it is the hot place for investors to store their cash during these turbulent times. Bonds have been having their best performance since 2002, by some measures.

A common phrase with bonds is that they are turning a “negative yield”, which means investors are buying bonds for more than their face value. An investor can lose money when the bond turns to a negative yield if the total amount of interest the bond pays over its remaining lifetime with less valuet han the premium the investor paid for the bond, in the first place.

What this indicates is that a growing number of investors are prepared to pay borrowers to make them money for increasingly longer periods of time. Germany made news when it sold new 30-year bonds with negative yields for the first time. The yield on the benchmark 10-year Treasury note fell below 2% in August 2019 and investors can expect higher returns on a short term bond than a long-term Treasury note, which indicates investors are using this as a safe haven for their money.

25% of all government and corporate debt, worth roughly $16 trillion (USD), is now negative yielding, which is up from $6 trillion in October 2018. This has typically been seen as an indicator of a recession, though a somewhat complex issue to explain for newer investors. Luckily, there is a video to summarize pretty much any subject, no matter how complicated, see below:

How to stabilize your portfolio:

Having clear investment goals is a key to success regardless of the financial climate. If that goal is to “lose less money than you have”, it's still a goal. From there, an investor can assess their risk, then diversify their portfolio with a collection of passively managed stock and bond funds.

Experts agree it is best not to steer clear of equities when a recession hits, even though the inclination might be to abandon stocks.

Core Sector Stocks

Major stocks with very long-term holding power, such as Telus Corp. (TSX:T, NYSE:TU). This could also be seen as a good bet for their forward thinking plans like utilizing smart-energy buildings and lack of risky public stunts like buying sports teams.

Reliable Dividend Stocks

Often seen as a solid way to generate passive income, companies such as Shoppers Drug Mart (TSX: SC) pose both attractive valuation and profitability metrics. Shoppers has also had a history of reporting stable long-term growth with innovative strategies.

Precious Metals

The US Global Go Gold and Precious Metal Miners ETF (NYSE: GOAU) is up more than 56% year-to-date as of August 2019. This ETF focuses on gold and precious metals miners and has the ability adjust to gold cycles, which also saw a boom period during that time not seen in years.

With some planning and due diligence both looking back at the previous recession and looking ahead to a number of contributing factors, investors can rest assured that if there is a recession in the near future, it is possible to not only survive, but thrive.


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September 4, 2019

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