How to trade during a recession
Times of recession represent unique opportunities for the savvy trader. Discover how to trade during them with our comprehensive guide.
Start trading today. Call +44 (20) 7633 5430, or email sales.en@ig.com to talk about opening a trading account. We’re here 24/5.
Contact us: +44 (20) 7633 5430
Start trading today. Call +44 (20) 7633 5430, or email sales.en@ig.com to talk about opening a trading account. We’re here 24/5.
Contact us: +44 (20) 7633 5430
If you’re ready to trade during a recession, follow these steps:
1. Make a decision to trade
Trading lets you speculate on rising or falling prices. With us you can trade derivatives via CFDs.
2. Choose an asset to trade
Access thousands of popular stocks and ETFs.
3. Open a live account
Fill in our online application form and create a CFD trading account.
Or, if you want to get a better understanding of what a recession is and how to take a position, here’s our full guide:
Learn more about recessions
While most investors and traders know that a recession signifies hard times, many have incorrect ideas about what it is.
A recession is when a country’s (or even the world’s) economy contracts and GDP (gross domestic product) declines as a result. Many people think that, if GDP falls (or simply fails to grow) for at least two quarters of a financial year, it’s a recession.
While this is indeed a ‘technical recession’, a recession is usually a state that’s declared by analysts and other financial experts who look for other characteristics of a depressed economic environment as well. These might be less consumer spending, increasing unemployment figures and lower levels of income for those who still have jobs.
What’s the difference between a recession and a depression?
Recessions and the business cycle
Recessions are a natural occurrence in the business cycle – a case of ‘what goes up must come down’. A business cycle means that a country’s economy will go through seasons where it expands, followed by ones where it contracts.
When an economy shrinks or stagnates for a lengthy period, this is a recession. These often create a downward spiral, because the results of recessions – like joblessness and drops in consumer spend and income – often worsen GDP figures further.
When influential developed economies such as the UK, China and the US head into a recession, it could create a ‘domino effect’ in other nations and can often trigger a worldwide recession.
Conversely, this can turn into an upward spiral when a recovery period begins. This is because an economy expanding boosts foreign investment, employment figures and consumer spending as incomes increase. If happening in a big enough economy, it can even trigger a worldwide rallying period.
Research how a recession affects the stock market
Recessions will impact stocks differently, depending on the type of company you’re looking to trade. Some shares will remain stable during a recession, like those of utilities, healthcare and consumer staples companies. Others tend to underperform and their value will drop, including travel companies, and industrials.
A recession is a cyclical contraction of economies, which means they’re always followed by a rallying. This means that other sectors, usually those that’ll underperform during a recession, will perform well in a post-recession recovery. Examples include real estate, consumer discretionary, industrials and materials.
Explore stocks to watch during a recession
The stocks to watch during a recession will depend on your appetite for risk. For traders that are willing to go long and short, there are considerable opportunities.
We’ve put together this table to show the stocks to watch during a recession, with reasons why in the following sections.
| Stock type | Short or long |
| Cyclical stocks | Possible short |
| Defensive stocks | Possible long |
| Speculative stocks | Possible long or short |
| Cash-rich stocks | Possible long |
Cyclical stocks
Cyclical stocks are often hit hard during recessions. These companies and sectors tend to be sensitive to the contemporary economic climate – meaning they increase when markets are on the rise, and decrease when markets are on the fall. So, during recessions when markets are falling, cyclical stocks are sometimes seen as opportunities to go short.
Defensive stocks
Defensive stocks are often used in a portfolio to hedge against risk and market declines. That’s because they’re generally seen as stocks that’ll weather an economic downturn. Sectors to look for include utilities and energy, which are always in high demand given their use in society. So, during recessions, some traders see defensive stocks as an opportunity to go long.
Speculative stocks
Speculative stocks are higher risk, volatile stocks that can see their share price rise or fall higher than traditional stocks during hard times.
Some common types of speculative shares include penny stocks, those new companies yet to make an established name for themselves, in sectors where share prices have dropped dramatically for whatever reason.
Cash-rich stocks
Cash-rich stocks (companies that have a lot of cash in reserve) can be even more volatile than other stocks during a recession. On one hand, strong cash reserves usually indicate high revenues – particularly if the company’s cash reserves are experiencing positive gains year-on-year (YoY). But, stagnant cash reserves might indicate that a company’s management team are unable to think of ways to spend it – which could hinder growth and have long-term negative consequences for the company’s performance.
However, during a recession, companies with higher cash reserves will likely be able to weather a short-term economic downturn by relying on the reserves of cash that they have held back. This can be used for a range of purposes, but most likely it’ll be to keep the company moving during times of reduced consumer demand. This means some traders see cash-rich stocks as potential opportunities to go long during a recession.
Explore other assets to watch during a recession
- Government bonds – many investors and traders flock to the perceived safety of bonds, and government bonds in particular are seen to be low risk, driving their price up
- Safe haven currencies – weaker currencies tend to be more vulnerable to extreme volatility in recessions. More stable currencies like the US dollar, British pound, Japanese yen and Swiss franc tend to weather the storm better, meaning that there’s substantial potential profit to be made in FX during recessions
- Commodities – uncertain, bearish markets often drive a demand for tangible commodities, so many traders will go long on them during a recession. Other commodities fare worse traditionally in recessions and so some traders will go short on those
- Gold and other precious metals – of all the safe haven commodities, gold is the most famous. The gold price historically spikes whenever there’s a recession. So do other precious metals, such as palladium, platinum and silver. It’s also often used as a hedge against inflation
- Indices – an index will track the performance of a collection of shares or even an entire sector. This means you can gain exposure to many companies at once at diversify for less risk, rather than putting all your eggs in one basket
- Options – with options, you get the right – but not the obligation – to buy or sell during a certain time period at a certain price. This’ll enable you to simply let the option expire if markets become too unpredictable
- Futures – trading futures means you can lock in favourable prices and keep positions open for long periods of time (for example, until the market changes) without incurring overnight charges
Decide whether to trade or invest*
You can trade the increased market volatility caused by recessions by creating a trading account and taking a position with CFDs. These are financial derivatives, which enable you to speculate on rising and falling markets by going long or short.
If you’d rather invest in the companies directly, you would need a share dealing account, something IG International doesn´t currently offer. This would make you a shareholder, and you would make a profit if the share price increased and you sold them for above the price for which you bought them. You would also get other shareholder privileges, like dividends and voting rights.
Learn more about trading vs investing
*With us you can only trade derivatives via CFDs.
Trading during a recession
When you trade with us, you’re using CFDs. These enable you to speculate exclusively on your chosen market’s price movements, without owning the underlying asset outright. This means that you can trade both rising and falling markets – useful in a recession, when many asset classes’ prices drop.
So, if you believe a market is set to lose value, you can take short positions on stocks, indices, forex, commodities, interest rates and more. You’d then make a profit from a decline in your traded markets’ price. However, if the price moves up, against your prediction, you’d incur a loss.
To take a position by trading CFDs, follow these steps:
- Research your preferred market
- Create a live account or practise on a demo
- Select ‘buy’ if you think the price will rise, or ‘sell’ if you think it’ll fall
- Take steps to manage your risk
- Open and monitor your trade
CFDs are a leveraged form of trading, meaning that you’ll pay an initial upfront deposit (called margin) to open a larger position. While this can make your capital go further, leverage also means that both profits and losses are calculated on the full trade amount and not your margin cost and could substantially outweigh this deposit amount.
Investing during a recession*
In bearish times, some might choose to invest rather than trade. Investing involves buying company stocks or ETFs outright. Unlike trading, investing isn’t leveraged, meaning that your risk of loss is limited to the amount you paid to open your position. Because investing is buying outright, you’ll pay the full amount upfront.
Many investors choose to wait out a wintry economic climate with shares in ‘safe’ companies – ones with robust balance sheets and sufficient cash flow likely to weather macroeconomic headwinds. They may also buy stocks that hail from recession-resistant industries.
*Remember, with us you can only trade derivatives via CFDs.
Find out how to hedge existing positions during in a recession
Hedging is a strategy you can use to reduce your risk of potential loss by having two opposing positions open, in order to make the most of the market no matter which way it turns.
For example, if you own an asset like shares in a company that you think will depreciate in value during the recession, you could short the same stock. If you’re right, the profits from your short position would offset a proportion of your share position losses.
But, hedging still incurs costs, which should be incorporated into your hedge calculations and projections. You can hedge using CFDs.
FAQs
What’s a recession?
A recession is an economic period when a country’s GDP (gross domestic product) drops by a significant amount over a lengthy period of time.
Can I short stocks during a recession?
Yes, you can. If you think a share price will depreciate during a recession, you’ll trade by selling (rather than buying) stocks using CFDs.
What are the stocks to watch during a recession?
There are various stocks worth keeping an eye on during a recession, including government bonds, gold and other commodities, indices, futures, options, consumer stocks and safe haven currencies.
How can I hedge during a recession?
You can hedge using CFDs, by going both long and short simultaneously on the same shares.
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