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The Recession Playbook: Three Strategies for Investors

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The following content is sponsored by New York Life Investments

The Recession Playbook: Three Strategies for Investors

Concerns about the economy and trouble in the U.S. banking sector have led to increased market uncertainty.

Before this began to surface, several factors were driving slower returns:

  • Inflation: Above-Target
  • Interest Rates: Restrictive
  • Economic Growth: Below Trend

In this graphic from New York Life Investments, we look at three recession investment strategies that have historically been resilient when the market has faced headwinds.

1. Value Equities

During periods of high inflation and slower growth, value equities have been well-positioned as a recession investment strategy, thanks to the following factors:

  • Income generation
  • Quality
  • High cash balances
  • Low correlation to the economic cycle

Value equities include the four most traditional “defensive” sectors, whose earnings are less correlated to economic cycles:

  • Real Estate
  • Utilities
  • Consumer Staples
  • Health Care

Not only have these sectors tended to be more resilient in downturns; cash flows from these sectors have been often positively correlated with inflation.

A moderate equity allocation to value equities within a diversified portfolio could help provide resiliency during times of above-trend inflation and below-trend growth.

2. Commodities

In today’s geopolitical landscape, there are a number of factors that may support the commodity sector, including:

  • Energy independence
  • China’s reopening
  • Minerals and metals to fuel green energy

With this in mind, here’s how investors may integrate commodities into their portfolio.

Traditional 60/40Sample Commodities Satellite Portfolio
Equities60%55%
Bonds40%40%
Commodities0%5%

As the above table shows, the commodities satellite portfolio represented a 5% exposure to commodity firms in the portfolio.

Next, when looking back over a 25-year period, a hypothetical portfolio with a 5% allocation to commodities had a stronger risk-adjusted return than a traditional portfolio. This can be seen in its Sharpe Ratio, which measures the risk-adjusted returns of a portfolio. A higher number is considered better.

Risk Metrics
(Jan 1998-Oct 2022)
Traditional 60/40

Sample Commodities Satellite Portfolio

Sharpe Ratio0.96
1.02
Average Drawdown
-4.2%
-3.7%

Given these factors, commodities may be positioned for strength.

3. Infrastructure

Infrastructure equities present key benefits as $1.3 trillion is projected in government spending over the next decade across energy, transportation, and broadband sectors.

Here are a few key drivers supporting infrastructure as part of a recession investment strategy:

  • High government spending
  • Cash flows may be correlated with inflation
  • Potentially more stable returns vs. alternative assets

Below, we show how investors can incorporate infrastructure into their portfolios.

Traditional 60/40Sample Infrastructure Satellite Portfolio
Equities60%50%
Bonds40%40%
Infrastructure Equities0%10%

As we can see, the infrastructure portfolio included a 10% allocation to stocks in the sector. Compared to a traditional portfolio, a portfolio with an infrastructure component had improved risk metrics between the period of January 1998 and October 2022.

Risk Metrics
(Jan 1998-Oct 2022)

Traditional 60/40

Sample Commodities Satellite Portfolio

Sharpe Ratio0.74
0.76
Average Drawdown-4.5%
-4.3%

Moreover, the infrastructure sector has been resilient when the market slides. For instance, the Dow Jones Brookfield Global Infrastructure Index outperformed the S&P 500 Index by a wide margin in 2022, 2008, and 2000 when the market faced increased turmoil.

In this way, infrastructure equities may present opportunities for investors looking to diversify their portfolios, especially as a recession investment strategy.

Remaining Resilient With a Recession Investment Strategy

Together, these three strategies may provide investors with more resilience regardless of the stage of the economic cycle:

  • Value Equities
  • Commodities
  • Infrastructure

Thanks to each of their specific attributes, investors can equip themselves with a recession investment strategy that may help offset the unexpected swings of the market cycle.

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Learn more about all-weather strategies with New York Life Investments.

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