Investing in a down economy carries additional challenges. Many smaller investors tend to pull money out of the market when it drops lower, which reduces the available opportunities. Formerly strong companies may fail to perform well. Positive news on earnings growth can be harder to come by. In general, investors seek security and stability in down markets. Companies that deal in entertainment and luxury tend to fall in value, while those that provide consumer staples remain stable or grow.
Agricultural and food processing companies often perform well in down economies. People always have to eat, even in a bad economy, so companies that fill stomachs enjoy stable profits.
Certificates of Deposit and Savings Accounts
Certificates of deposit and savings accounts provide stable returns in a government-guaranteed vehicle. The Federal Deposit Insurance Corporation (FDIC) covers bank accounts and certificates of deposit for up to $100,000, ensuring that no matter what happens to the issuing institution, your money remains safe.
Precious metals don't necessarily increase in value in a down economy, but they do have the advantage of retaining at least some value over the long term. Some exposure to precious metals in a portfolio during periods of weak economic activity can hedge against losses from equities.
Highly rated corporate bonds and government bonds are stable investments in any economy. The yields act as a source of passive income. Municipal bonds aren't subject to state or local taxes, making them attractive securities for investors in higher tax brackets.
Determining which companies are undervalued can be a challenging process, but as a rule of thumb, if a company has a strong debt to equity ratio and has maintained at least some growth during a weak economy, the stock price will likely grow during a recovery.
The defense industry tends to perform well regardless of how the economy is performing. Wars are being fought somewhere in the world at all times, ensuring that there's always a ready market for weapons.
Hedged Mutual Funds
Hedged mutual funds are bench-marked towards regular growth no matter how the economy performs. Such funds are highly diversified and controlled by tight risk management strategies. These tend to perform better than mutual funds aimed at taking advantage of high growth market conditions.
Pharmaceutical companies provide a service that keeps many people alive. Even when families reduce spending in a down economy, they still need to pay for pills. People will forgo new clothing or a big-screen television to pay for life-saving drugs.
The global economy rarely moves in lock-step. While some countries may be experiencing a recession, others can enjoy wild growth. Look abroad or in global mutual funds to take advantage of global opportunities.
The energy sector is highly dependent on changes in often volatile energy prices, but the service that such corporations provide keeps the world economy at large moving. The largest energy companies are unlikely to go bankrupt. Investing in energy corporations is a strong long-term strategy because of the underlying fundamentals.
John Hewitt began freelancing in 2008, writing about subjects ranging from music to stock trading, the energy industry and business. His ghostwritten work has appeared all over the Web. He attended New York University, pursuing a bachelor's degree in history.