Stubbornly high inflation, interest rates that have risen at the fastest pace in history, and massive corporate layoffs are leading many to believe that a recession is imminent. Besides the pandemic-fueled economic downturn, the U.S. hasn't had an official recession since the financial crisis roughly 15 years ago. It's possible many people are just worried that we're due for a severe one, which is justified given how scary the negative financial headlines can be.
Investors have no control over what happens with the broader economy, and that includes a recession. But they do have the power to do something about it and better position themselves for long-term financial success. Let's take a closer look at what I mean.
Gaining better perspective
The economy expands more often than not, but once in a while, there's a downturn. The issue is that while many well-educated economists and so-called financial experts claim to be able to predict when a recession is going to happen, the truth is that no one has any idea.
The economy is inherently unpredictable. It basically rests on the day-to-day actions of billions of people across the world, which itself is dependent on their views about the future. What throws a curveball in all of this is the fact that everything is interrelated, with individuals and companies adapting to the environment.
For example, a recession could be a self-fulfilling prophecy. A reputable news outlet could predict that one is coming in the not-too-distant future. This could scare companies, leading executives to cut back on growth investments and lay off employees. And stock prices could fall.
The average consumer, on the other hand, starts to see pessimism everywhere. Maybe the value of their home declines along with the stock market. Someone they know might have lost their job. So, they really start to watch their spending. And this reduced spending directly impacts businesses and their revenue prospects.
It's all connected, which makes it hard to predict.
Taking care of personal finances
The positive takeaway is that investors don't need to know when a recession is coming. We can always do things to put ourselves on stronger financial footing. This means boosting your productivity at work and finding ways to raise your income. Additionally, it means tackling high-interest debt like credit cards.
Having an emergency savings fund set aside can also provide flexibility and peace of mind should the worst-case scenario happen, like a medical emergency or a job loss. Taking care of these critical things increases the possibility that a recession is manageable.
Owning high-quality businesses
By first realizing that we have zero control over the state of the economy at any given moment, while also focusing on ensuring that our personal finances are healthy, we can now turn our attention to our investment portfolios.
It's paramount to keep a long-term mindset. The stock market is volatile, but over time, it goes up. Knowing this fact will help investors stay the course when things get difficult.
In my opinion, it's best to pick high-quality companies with durable customer demand and staying power. It's even better to find businesses that are recession-resistant.
Leading auto parts retailer O'Reilly Automotive is a good example of a stock to own. Because consumers tend to delay new car purchases and instead spend money on extending the lives of their existing vehicles during economic downturns, sales for the company are strong in those periods. Even in thriving economies, the business does well.
What's more, O'Reilly is consistently profitable, producing a ton of free cash flow each and every quarter that it regularly uses to repurchase outstanding shares. And the stock has been a huge winner, rising 222% over the past five years and 722% over the past 10.
Recessions are par for the course for the economy, and it's something investors must get comfortable with. Positioning your portfolio with this reality in mind is a smart move.