Stock Market Investing Strategy: A Recession Playbook for Use in the Face of a Sell-Off

• Recession fears are causing investors to de-risk their portfolios, leading to a stock market sell-off.
• Weak economic data, including rising unemployment, have fueled fears of a recession.
• Investors are responding by investing in defensive and dividend stocks, as well as government bonds.

The stock market crisis is in full swing as panicky investors try to aggressively de-risk their portfolios, fearing a recession.

Major stock indexes have fallen for three days in a row, selling off in response to a series of weak economic data. Investors are wondering whether the Federal Reserve waited too long to cut interest rates and whether it is too late to stave off a recession. With indexes deep in the red and the Nasdaq 100 in correction territory, calls for an emergency rate cut are mounting.

But that doesn’t mean every area of ​​the market is being affected. While the S&P 500 is down 5% since last Thursday, Aug. 1, three sectors in the benchmark index actually stayed in the green: real estate, media and consumer discretionary. Seen as safe bets during market turmoil, they outperformed amid investor jitters.

The same goes for ultra-safe bonds. U.S. Treasury yields are at their lowest levels in a year as investors defend themselves and flee into government debt.

Below are four areas of the market that are outperforming and clearly show that investors are employing strategies to weather the recession:

1. Defensive actions

Investors are putting money into defensive stocks, such as consumer discretionary and utilities, which tend to fare better during tough economic times.

Since Thursday, the S&P 500’s consumer discretionary and utilities indexes are up 0.7% and 0.3%, respectively. Along with housing, they are the only areas of the benchmark index to gain over the past three trading days, while all other areas of the market have seen losses of up to 10%, according to Bloomberg data.

“With the pace of U.S. economic growth expected to slow in the second half of 2024 and into 2025, investors have turned to the stability of defensive stocks to position their portfolios for a potential slowdown,” said David Sekara, chief U.S. market strategist at Morningstar, in a recent note.

2. Dividend-paying stocks

Stocks that pay dividends to shareholders are also becoming increasingly popular, which is another popular way to survive a recession.

Utility stocks, which often pay dividends, have outperformed the broader S&P 500 over the past few trading days, with the iShares Global Utilities ETF up 12.7% from year-to-date levels.

3. Government bonds

U.S. Treasury bonds surged on Monday as investors eyed sharp interest rate cuts — a policy move that typically signals the Fed’s response to recession risks.

Treasury yields, which fall as government bond prices rise, hit a one-year low Monday. The yield on the 10-year U.S. Treasury note fell 10 basis points in early morning trading, while the yield on the 2-year U.S. Treasury note fell 16 basis points.

“Bonds are seeing demand for safe havens,” David Rosenberg, chief economist at Rosenberg Research, said in a note Monday. “For macroeconomists, I have news: The bond market is telling you something not so good is about to happen,” he added later.

4. Selling shares of companies with high growth potential

Meanwhile, investors are dumping fast-rising growth stocks — especially tech stocks — from their portfolios. The Nasdaq has deepened its slide into correction territory this week, with the tech index down 12% over the past 30 days.

Meanwhile, the S&P 500 information technology index has fallen 9% over the past three days.

“The tech bubble, like in 2000 (and not just the dot-coms but the entire sector that got swept up in the Internet, as is happening now with the AI ​​craze), is in the process of bursting,” Rosenberg wrote. “As we saw with routers, cable, and fiber in the late 1990s, concern about AI investment is now starting to grow, and the comparisons are stark.”

Still, some forecasters say the outlook for a recession remains uncertain. While the slowdown in the labor market looks concerning, the weakness in the latest jobs report was likely exaggerated due to recent weather events that temporarily displaced about 416,000 workers, Ned Davis Research said in a note.

“Next year pricing makes sense if the US economy falls into recession and/or inflation falls below the Fed’s 2% target,” the analysts said of market expectations for rate cuts. “While we could get there, that’s not our decision at this point.”