Asset Allocation

Bracing for Recession: An Investment Playbook

June 30 2023

How can investors prepare for the recession that's likely on the way?

It’s a strange time to be an investor. In the last few years, sudden and dramatic capital markets events have become routine and obscured the outlook for what’s ahead. Despite the uncertainties, there’s one thing we do know: The likelihood of recession in the next 12 to 18 months in the U.S. is high. As Sébastien Page, head of Global Multi‑Asset and chief investment officer, noted in T. Rowe Price’s Global Market Outlook:

  • 10 of the last 13 hiking cycles ended in recession in the U.S.
  • The Federal Reserve has never lowered inflation by 4% or more without triggering a recession.
  • There has never been a spike in inflation above 5% that didn’t result in a recession.

While recession and deflation typically go hand in hand, the possibility of higher inflation and interest rates for longer can’t be discounted outright. Inflation has defied market—and Fed—expectations before. It could happen again.

With this as a starting point, we’ve put together a framework for thinking through, and preparing for, the two most likely scenarios ahead: a full‑blown recession and a milder economic slowdown, or “soft landing.” All eyes are now on the Fed, as how they manage inflation will likely determine which scenario becomes reality.

Investment Considerations

  Recession Soft Landing  
Large-cap U.S. stocks

+ In a steep recession, growth‑oriented large‑caps could benefit from the flight to quality associated with downturns and benefit as economic growth returns.

 Overall, valuations are historically high, leaving room for multiple contraction.

— Earnings expectations haven’t priced in a significant slowdown, increasing the downside risk.

— Cyclically oriented value stocks tend to be less attractive in sharp downturns.

+ Would provide upside as earnings growth reaccelerates.

+ Cyclical value stocks could benefit from a milder economic slowdown.

+ Income‑oriented approaches tend to weather declining or volatile markets more effectively.

— Growth stocks may be challenged if rates are higher for longer.


Small-cap U.S. stocks

Small‑cap valuations have already priced in a tougher economic scenario.

— An increasing emphasis on quality could put unprofitable companies in greater jeopardy.

— Inflation and wage pressures have a bigger impact on the margins of smaller companies.

Already low valuations would present an opportunity for upside.

Could benefit as earnings growth reaccelerates, especially during the early stages of a new cycle.

International stocks

— Less attractive if global industrial production and exports suffer.

— A flight to safety would likely strengthen the U.S. dollar and weigh on international stocks and currencies.

Would benefit from current monetary and fiscal policy in emerging markets.

China’s continued reopening from COVID lockdowns could offer an opportunity for outperformance, barring a sustained global economic downturn.

Core fixed income

Could benefit from falling yields and a normalized yield curve should the Fed react in line with expectations and inflation fall to expected levels.

+ A high‑quality, long duration asset may provide a ballast relative to equity market volatility.

A shorter‑duration, higher income asset may counter an increase in rates

— Vulnerable to losses as interest rates rise, should inflation remain sticky, and should the Fed take a path contrary to current market expectations.

High yield bonds and bank loans

Overall, less attractive as defaults rise and spreads likewise widen; however, higher income may act as a buffer against losses.

+ Increasing bank loan defaults could make high yield bonds more attractive relative to bank loans.

+ High yield may be attractive relative to equity investments, with the extra income offering some ballast.

— Bank loans could be less attractive as short‑term interest rates fall.

+Current valuations for high yield bonds are favorable, and credit fundamentals are supportive.

High yield may be attractive in periods of volatility relative to equity investments.

Further Fed rate hikes may be a benefit to bank loans.

Municipal bonds

Lack of new issuance creates a supply/demand mismatch, leading to stronger performance potential.

Could benefit from falling yields and a normalized yield curve.

Vulnerable to falling credit quality as tax revenues fall on slowing economic activity.

Lack of new issuance creates a supply/demand mismatch, leading to stronger performance potential.

Vulnerable to losses if interest rates rise, should inflation remain sticky, and should the Fed take a path contrary to current market expectations.

International bonds

Additional yield and similar quality to core bonds may prove beneficial should rates fall.

— May not keep pace with U.S. core bonds should U.S. yields sharply fall.

A flight to safety could strengthen the dollar, and conversely weigh on currencies, negatively impacting unhedged bonds.

May be attractive relative to U.S. core bonds if interest rates rise, should inflation remain sticky, and should the Fed take a path contrary to current market expectations.

The additional yield available to bond investors (hedged) may provide a good source of income and performance.

Could benefit from a weakening dollar (unhedged).

Foreign central banks may not pause, putting pressure on non‑U.S. yield curves and causing prices to fall.


Already low valuations could present an opportunity for upside.

— Stiffer depositor competition could weigh on net interest margins.

— Rising loan defaults could weigh on profitability.

Banking sector issues may be contained.

A more supportive lending environment could drive profitability.

— Deposit flight risk and higher interest rates on deposits could weigh on profitability.


Many companies are already cutting costs to drive profitability.

Mega‑cap technology companies have exhibited defensive characteristics in prior downturns.

May be more interest rate sensitive and benefit from falling interest rates, should they occur.

— Valuations are historically high, leaving room for multiple contraction.

— Technology stocks may prove more cyclical than in past periods.

Many companies are already cutting costs to drive profitability.

Multinationals could benefit from a weakening dollar.

May be more interest rate sensitive and suffer from rising interest rates should they occur.

Real assets and commodities

A slowdown in activity due to lower economic activity and a reduction in rates could support residential real estate valuations.

— Certain sectors of commercial real estate could benefit while others languish as increased financing costs weigh on margins.

— Precious metals tend to benefit from a flight to quality. Otherwise, less economic activity could weigh on commodity prices.

Stable demand could drive up commodity prices.

Tighter financial conditions could slow both commercial and residential real estate activity.

Alternatives Uncorrelated assets (relative to equities and fixed income) could act as a ballast during declining or volatile markets.

High inflation, and a greater dispersion of returns across asset classes could drive opportunity.

—  Less attractive in an equity market recovery.


Prepare Your Portfolios for Any Scenario

If you’re looking for a partner to help navigate recession risks and uncover opportunities, we can help. Our integrated suite of Portfolio Construction Solutions provides everything you need to enhance investment outcomes and position your practice for success. Contact your T. Rowe Price representative to learn more.

Get the full story.

We’re ready to share our latest thinking, but industry regulations require you to register or sign in to continue reading this article. Thank you for understanding.

Just one more step.

To continue, you are required to read and accept our Terms & Conditions. Thank you for understanding.

Important Information

Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency.

Small‑cap stocks have generally been more volatile in price than the large‑cap stocks.

Funds that invest in growth stocks are subject to the volatility inherent in common stock investing, and their share price may fluctuate more than that of a fund investing in income‑oriented stocks.

International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets.

Fixed‑income securities are subject to credit risk, liquidity risk, call risk, and interest‑rate risk. As interest rates rise, bond prices generally fall.

Investing in technology stocks entails specific risks, including the potential for wide variations in performance and usually wide price swings, up and down. Technology companies can be affected by, among other things, intense competition, government regulation, earnings disappointments, dependency on patent protection and rapid obsolescence of products and services due to technological innovations or changing consumer preferences.

The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced.

Commodities are subject to increased risks such as higher price volatility, geopolitical and other risks.

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

T. Rowe Price group of companies including T. Rowe Price Investment Services, Inc., T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from

T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision. Information and opinions, including forecasts and forward‑looking statements, presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

T. Rowe Price Investment Services, Inc.

© 2023 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.



Preferred Website

Do you want to go directly to the Financial Advisors/Intermediaries site when you visit ?

You are currently logged in to multiple T. Rowe Price websites.

You will need to log out below and log back in with your Advisor Dashboard credentials.