What’s the biggest risk to the stock market right now?
The stock marketâs managed to recover from its big decline after the US made its big tariff announcement on 2 April. But thereâs still plenty for investors to keep an eye on.
Inflation, the Russia/Ukraine war, and the possibility of an artificial intelligence (AI) bubble bursting are all genuine concerns. But the biggest threat might be none of these.
The received view
According to the latest Bank of America survey of fund managers, thereâs one major risk that stands above the rest. Itâs the possibility of a trade war triggering a global recession.
That seems reasonable to me. But itâs worth noting that the number of managers identifying this as the biggest threat in May is slightly lower than in April.
More generally, expectations of a recession seem to be declining. And since the survey, the prospect of lower tariffs between the US and China are likely to have reduced the risk further.
Given this, itâs probably fair to say that the perceived recession risk is subsiding. But Iâm wary about dismissing the possibility of an economic slowdown for a couple of reasons.
Recession risks
One is that recessions generally show up when people are least expecting them. When people are on the lookout for signs of a slowdown, things tend not to go that way.
Another is the volatile nature of trade policy at the moment. If the last couple of months have shown investors anything, itâs that things can turn around very quickly â in either direction.
As a result, I think the time to consider getting a portfolio ready for an economic slowdown is now. By the time the stock market sees it coming, there might not be time to do anything.
With my own investing, the way I plan for a recession is by maintaining a diversified portfolio. And that includes some businesses I expect to do well even in an economic slowdown.
Resilient investments
Strictly, I think Rentokil Initial (LSE:RTO) is classified as an industrial stock rather than a defensive one. But demand for its products is relatively acyclical â pests donât show up less in a recession.
Despite this, it also looks as though the company has clear scope for growth. Itâs currently working through an integration process after an acquisition that I expect to boost profits in the long run.
The CEOâs recently announced his intention to retire, which I see as a surprise given where the company is right now. With the firm in transition, a change in leadership creates a risk for investors.
Rentokilâs long-term strengths though, are hard to dispute â it has a strong position in an industry thatâs growing and isnât cyclical. Recession or not, I think thatâs a powerful combination.
Foolish takeaway
Fund managers have started to shift their portfolios away from defensive stocks in the last month. But I think the key to investing well is trying to find opportunities when others are looking elsewhere.
Part of this involves getting ready for a recession when investors are starting to go off the idea that oneâs on the way. And thatâs why Rentokil is on my list of stocks to consider buying at the moment.
The post What’s the biggest risk to the stock market right now? appeared first on The Motley Fool UK.
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Bank of America is an advertising partner of Motley Fool Money. Stephen Wright has positions in Rentokil Initial Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.
