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Several indicators point to a recession in the near future. Here are 5 assets investors turn to when things go awry.
Several indicators point to a recession in the near future. Here are 5 assets investors turn to when things go awry.
Ben WinckAug 10, 2019, 17:35 IST
Traders work on the floor at the NYSE in New YorkReuters
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Recent developments including the ever-escalating US-China trade war and signs of a widespread global economic slowdown have many experts on recession watch.
Major US stock indexes are still within shouting distance of record highs, but investors fearing a sharp economic downturn are still on the hunt for other assets that can lessen the blow and offer safety.
Here are some popular assets investors turn to when markets and the economy take a turn for the worse.
It is, of course, preferable to already be in these assets when the downturn does strike.
Recent events brought plenty of reasons for investors to seek out less volatile assets. Though major US stock indexes are still fresh off record highs, economic indicators around the world signal greater probability of a recession in the near future.
Here are a few historically popular assets investors flock to when markets go haywire:
The very nature of Treasury bonds make them far more stable than stocks. T-bonds are insured by the federal government, as it can increase taxes or cut spending to ensure payments are made to bondholders. In turn, they have very little risk of default.
Though government bonds aren't completely resilient during economic recession, their buy-and-hold nature and steady coupon payments appeal to those who prefer to not stomach the wild swings in the stock market.
Gold
Despite its price changes every day, gold's historic allure and scarcity makes it among the most popular "safe havens" for investors looking to exit volatile markets. Gold now sells for just over $1,500 per ounce, its highest level in six years.
China has been stocking up on gold for eight months straight, with its reserves holding about $93 billion worth of the precious metal by the end of July. The move is seen as insurance against the trade war and a slowing national economy, and has helped to drive gold's price higher.
Though gold's value does fluctuate in the short-term, it serves as an effective hedge against both inflation and deflation. Additionally, geopolitical uncertainty has boosted demand for gold, driving its price higher as investors jump to the metal. The fact that gold has remained a prized commodity for centuries establishes a strong precedent for its role as an alternative asset.
Defensive stocks
The "defensive stocks" category consists of companies in the food, home supplies, healthcare, utilities, and real estate segments. Such stocks also tend to pay dividends to their shareholders, guaranteeing a small yet stable form of income.
Defensive stocks tend to outperform other sectors during recessions due to their common necessity. Even during periods of economic downturn, consumers will need the products sold by such companies, and that steady demand keeps these companies afloat even during the most trying economic times.
A few large defensive stocks include Coca-Cola, Johnson & Johnson, and Philip Morris. These companies still trade daily and follow broad market trends, but for those who'd prefer to keep their money in stocks, these businesses have held their value better than others in bear markets.
Cash
It may be obvious, but the US dollar remains one of the most stable assets around the world. Holding cash insulates investors from wild swings in the market, and even gains value during times of deflation, as a dollar's buying power rises.
Cash reserves also give investors the opportunity to scoop up other assets as their prices dip during economic downturns. Buying assets at low points brings a holding's average cost down and sets investors up for favorable returns when markets rebound.
Real estate
Like with defensive stocks, real estate represents a necessity for individuals, and as the worldwide population grows, betting on robust housing demand is a popular move. Home prices drop during recessions, and timing a purchase is crucial. If the economy follows its historical cycle and recovers from its lows, home prices rise in kind.
Real estate also comes in a range of forms, so investors can pick between anything from a single studio apartment to a lavish mansion. Renting out a purchased home or apartment can also serve as a stream of steady income as an owner waits to sell.
