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Should I sell my shares if a recession is imminent?

The FTSE index has had a rough week, with red flashing all over portfolio lists, watch lists and ticker boards. If you’re getting a sinking feeling and contemplating selling your stocks, take solace in the fact that you’re not alone.

Considering the trade war tensions between the US and China, a potential recession hitting Germany and France, Italy’s political problems, protests in Hong Kong and the increasing prospect of a no-deal Brexit, the economic backdrop for the stock market is neither dull nor cheery.

Economic indicators

It is no surprise that economists are predicting a downturn within the next six months. A few tell-tale signs have arisen this past week, first the 10-year US treasury yield curve inverted and fell below 2% for the first time since 2007. It’s regarded by many as an accurate indicator of bad times ahead and has inverted before each of the last seven recessions. And there was an announcement that retail sales plummeted 49% this month year-on-year, the biggest plunge since 2008 and increasing the worry of a deteriorating retail environment in the UK. In addition, the US factory sector has contracted for the first time since 2009 and US exports also fell at the fastest rate seen since 2009.

However, all this economic doom and gloom doesn’t mean you should rush out and sell your shares. Just remember, recessions don’t last forever (if they even begin), and the market will at some point bounce back, so if you’ve got cash to splash, I think it could be the perfect time to do it.

Don’t panic, but seek good quality companies with low debt, good dividend income and continued growth prospects to buy into. This should always be your mantra, whether or not the economic environment is bad, and if you’re buying a company with good fundamentals, it should survive a recession and eventually regain its share price. I think Big Pharma firms such as Astrazeneca or GlaxoSmithKline are relatively fairly safe bets in a downturn because medicine will always be required, and these companies are unlikely to go bust. I believe the same goes for defence companies such as BAE Systems.

Hold your nerve

A recession may provide bargains to potential investors because the fear factor scares many away, which causes share prices to fall. If a company share price is falling because it has done something wrong to warrant it, then selling may be something to consider. But if it is down due to wider economic jitters, then I think you’d be wiser waiting for the bad news to pass and the company’s share price should eventually rally. You could even buy more if it’s cheap and you believe in the firm.

If you can put the global picture aside and focus on the fundamentals of each business you are investing in, I don’t think you can go too far wrong. With volatility causing share prices to bounce around, you simply need patience and confidence in the businesses you’re buying into.

So should I sell all my stocks if a recession is imminent? Stock-picking oracle Warren Buffett offers sage advice when it comes to selling: “Truly good businesses are exceptionally hard to find. Selling any you are lucky enough to own makes no sense at all.”

I agree with him wholeheartedly. Hold your nerve and hold your shares.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.