If there's one thing that may slow down the stock market this year, it's a recession. While low interest rates may be good for growth stocks, a lack of economic growth isn't good for any business. Although consumers and businesses have been showing resiliency amid inflation and higher interest rates, that doesn't mean this resilience will last forever.
The economy is still growing, but there may be trouble ahead. One indicator suggests that things haven't been this bad since the Great Recession. Let's see what this could mean for investors.
Corporate defaults haven't been this high since 2009
A report from the S&P covering the first two months of the year says that there have been 29 corporate defaults in 2024. The last time there were that many defaults at this stage of the year was in 2009, when there were 36. Some economists aren't surprised, however, noting that higher rates are putting more pressure on businesses with high debt loads.
Included within that tally are eight defaults in Europe, which is more than double what was reported last year at this stage. And with rate cuts not imminent and interest rates potentially staying higher for longer, the risk is that the number of corporate defaults may continue rising at an alarming rate for a while.
A correction in the market could be coming
The near-term risk for investors is that with many stocks soaring to sky-high valuations, a correction could be overdue for many stocks. Right now, companies are still generating strong growth and sales are increasing, but if businesses are struggling and the economy falls into a recession, that could come to a grinding halt.
The danger is that as those growth rates slow down significantly, investors may start to think twice about some of the valuations that growth stocks are trading at. In the short term, at least, a recession could put stocks under significant downward pressure, and the markets as a whole could give back some of the impressive gains they've generated over the past year and a half.
Investors are still better off in stocks
What the past few years have undoubtedly taught investors is that the economy -- and the stock market -- can be completely unpredictable. Trying to forecast whether there will be a recession this year or whether rate cuts will happen is next to impossible. Billionaire investor Warren Buffett has made a fortune out of stock picking, and he places no importance on economic projections when choosing which stocks to buy. Instead, he focuses on investing in quality businesses.
By trying to time the market and sell stocks at a time when you might expect a slowdown, you could miss out on profits. A good alternative for investors may be to simply move money out of expensive, high-priced stocks and into a balanced exchange-traded fund (ETF). One such option is the Invesco QQQ Trust (QQQ +0.14%), which gives investors exposure to the top 100 non-financial stocks on the Nasdaq exchange.
NASDAQ: QQQ
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While you would still have exposure to stocks such as Microsoft, Nvidia, and Meta Platforms in that ETF, because of the diversification the fund offers, it makes for a more balanced investment than holding each one of those stocks all on their own. And with an expense ratio of just 0.2%, the ETF's costs won't eat up much of your returns.
Over the past decade, the Invesco QQQ Trust has achieved total returns (including dividends) of 450%, which is far higher than the 240% gains the S&P 500 has generated during that stretch. If you're worried about individual high-priced stocks, investing in the Invesco QQQ Trust or other ETFs can be a way to help minimize your overall risk while still remaining invested in the market.
