Many watching the market are concerned that regardless of the outcome of an attempt to avoid the fiscal cliff there will be a recession in 2013.
Without a doubt, a recession would be unwelcomed by investors with a short investment horizon (1-3 years), but for those with a longer investment horizon, say 3+ years, it could be a great opportunity for profit. So what should potential investors do to prepare for this opportunity? Three things:
- Accumulate cash and review your portfolio
- Identify sectors that will see market prices depressed in a recession
- Find the stocks within the sector with the best fundamentals
Accumulate cash and review your portfolio
This does not mean sell off your portfolio; it means do not buy more stocks for now. If a recession in 2013 happens, you want to have cash ready to scoop up stocks for cheap. Hedge funds started doing this as early as August and continued into October.
It also makes sense to review your portfolio. Again, the idea is not to sell off your entire portfolio. The idea here is to prune the portfolio of any investments that no longer look attractive if we were to see a recession in 2013. If the reason why you invested in a particular equity is not affected by a short or long recession, then feel free to ride it out. The purpose of this review is to reduce or eliminate positions whose underlying reasons for purchase are impacted by a 2013 recession.
Identify sectors that will see market prices depressed in a recession
From 2009-2010, the 10 industries hit hardest by the recession (from worst to least) were:
- Building material and supplies dealers
- Home furnishing stores
- Lumber and other construction material wholesalers
- Other motor vehicle dealers
- Cement and concrete product manufacturing
- Newspaper, periodical, book, and directory
