If there's anything that could slow the stock market this year, it's a recession. Low interest rates may be good for growth stocks, but a lack of economic growth is bad for any company. Consumers and businesses have shown resilience amid inflation and rising interest rates, but that doesn't mean this resilience will last forever.
The economy is still growing, but there may be challenges ahead. Some indicators suggest that the situation has not been this bad since the Great Recession. Let's take a look at what this means for investors.
Corporate defaults have not been this high since 2009.
There were 29 corporate defaults in 2024, according to an S&P report covering the first two months of this year. The last time he had this many defaults at this stage of the year was in 2009, when he had 36. Some economists say it's not surprising, however, that rising interest rates are putting even more pressure on heavily indebted companies.
The tally also includes eight defaults in Europe, more than double the figure reported last year at this stage. And with no rate cuts imminent and interest rates likely to remain high for an extended period of time, there is a risk that corporate defaults could continue to rise at an alarming rate for some time.
A market correction may be coming.
The short-term risk for investors is that valuations for many stocks are high, and many stocks may be slow to correct. At the moment, the company is still experiencing strong growth and sales are increasing, but if the company struggles and the economy falls into recession, that growth could come to a rapid halt.
The danger is that as those growth rates slow significantly, investors may start to rethink some of the valuations of growth stocks. At least in the short term, the recession could put significant downward pressure on stocks, potentially allowing the broader market to regain some of the impressive gains it has generated over the past year and a half.
Investors still have an advantage in stocks
What investors have undoubtedly learned over the past few years is that the economy, and the stock market, is completely unpredictable. Trying to predict whether there will be a recession this year or whether there will be a rate cut is nearly impossible. Billionaire investor Warren Buffett has made his fortune by picking stocks, and he doesn't rely on economic forecasts when choosing which stocks to buy. Instead, he focuses on investing in quality businesses.
Timing the market and selling stocks when an economic slowdown is expected can cause you to miss out on profits. A good option for investors may be to simply move money out of expensive stocks and into balanced exchange-traded funds (ETFs). One such option is Invesco QQQ Trust (QQQ -0.18%)This gives investors exposure to the world's top 100 non-financial stocks. Nasdaq exchange.
Although there is still exposure to stocks such as microsoft, Nvidiaand meta platform With this ETF, the diversification the fund provides makes it a more balanced investment than holding each stock alone. And with an expense ratio of just 0.2%, the ETF's costs won't eat up much of your income.
Over the past 10 years, Invesco QQQ Trust has delivered a total return (including dividends) of 450%. This is much higher than Invesco QQQ Trust's 240%. S&P500 generated during that stretch. If you're concerned about individual high-priced stocks, investing in Invesco QQQ Trust and other ETFs can minimize your overall risk while remaining invested in the market.
Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool's board of directors. David Jagielski has no position in any stocks mentioned. The Motley Fool has positions in and recommends MetaPlatform, Microsoft, and his Nvidia. The Motley Fool recommends the Nasdaq and recommends the following options: His January 2026 $395 long call on Microsoft and his January 2026 $405 short call on Microsoft. The Motley Fool has a disclosure policy.
