It’s official:
The Federal Reserve now predicts that a recession will hit the U.S. starting later this year.
On April 15, NPR reported that the Federal Reserve predicted a “mild recession” starting sometime in the Fall or Winter months, followed by a recovery in 2024. The fact that many economists are predicting a recession isn’t news. People have been forecasting a 2023 recession since early 2022. However, the fact that the Fed is predicting one lends extra credibility to the claim that one will occur, since the Fed has access to some of the best economic data anywhere on earth.
If the U.S. does enter a recession, like the Fed predicts, the effects will likely spill over to Canada. The Canadian and U.S. economies are deeply intertwined, as the U.S. is Canada’s largest trading partner. Therefore, a slowdown in economic activity South of the border will likely be felt here as well. In this article, I will explore some ways you could invest to prepare for a future U.S. recession.
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Invest in “non-cyclical” assets
The best assets to hold during recessions are “non-cyclical” assets like utility stocks. Such assets are considered fairly recession proof, because they provide essential services that are among the last things people will ever cut out of their budgets. In a recession, even if laid off, a person would likely fight tooth and nail to keep the heat and lights on. They’d sooner sell their car than go cold in the Winter. For this reason, utilities’ revenue tends to be stable even during recessions.
A good example of this phenomenon is Fortis Inc (TSX: FTS). Fortis is a Canadian utility with assets in Canada, the U.S., and the Caribbean. In 2008, when the global financial crisis was destroying many companies’ earnings, Fortis actually grew its earnings. In 2020, it was the same story all over again: when COVID-19 was putting people out of work, the company still managed a small increase in adjusted earnings per share, which grew from $2.55 to $2.57. That’s only a 0.78% increase, but it’s impressive when you consider how many companies were actually losing money that year. Many retailers and real estate developers went out of business because of the pandemic.
Have money ready to buy any dips
Once you know what kinds of assets you’re going to buy in a recession, your next step is to plan for when you’ll buy them. It’s good to save lots of money and buy into stocks over time, rather than putting all of your money in at once, because you never know when the market will take a leg lower. By buying into the markets progressively over time, you guarantee that, at some point, you will buy close to the bottom, thereby lowering your adjusted cost basis.
Foolish takeaway
Recessions might seem scary, but the truth is that it’s all a matter of how you respond to them. If you save diligently, then recessions can be great opportunities to buy cheap and build wealth. So, don’t worry about a coming recession. Expect one, and hope for one.
