Should you invest in the tech industry in a recession?

What makes a good investment during a recession? Is investing in the tech industry safe when the economy is low? Read on to learn how to use what previous recessions have taught us to choose your tech investments wisely.

If we want to know how the tech industry stands to weather the future, the first step is to look to the past. Let’s take a look at the last three U.S. recessions and their effects.

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The Dot-Com Crash

Overinvestment in tech startups drove the price of their stocks artificially high. When investors realized that many of those startups had little to no hope of actually turning a profit, company values took a sharp drop. The panic of the sudden decline led to even more selling, eventually triggering the recession.

Since this recession centered on the tech industry, it felt the majority of the impact until the terrorist attacks on September 11, 2001, devastated the rest of the economy along with it. However, without the initial crash, it’s uncertain how this industry would have fared.

The Great Recession

When the subprime mortgage market collapsed in 2008, triggering the Great Recession, the U.S. economy suffered a staggering setback. The Dow Jones Industrial Average and S&P 500 were suddenly worth half as much, gross domestic product (GDP) dropped by 4.3 percent, and the unemployment rate climbed to 10 percent.

In the tech industry, however, big companies like Intel, Apple, and Microsoft picked up their expansion plans and increased their focus on research and development. Unlike what had happened in 2001, the industry was far from the crash’s epicenter and able to carry on. Believing that the world will always have a need for tech, big companies ensured they’d be ready when recovery let the demand rise again.

The COVID-19 Recession

While the recession at the start of the COVID-19 pandemic may have only lasted a few months, its effects were staggering. The unemployment rate rose to 14.7 percent by April 2020, and the GDP contracted 31.2 percent in the second quarter of the year.

However, as lockdowns rolled out and most people limited their time outside their homes, technology became more crucial than ever. Online shopping, video calls, and streaming entertainment were seeing more use than ever and the tech industry thrived.

In 2020, the combined revenues for Amazon, Apple, Microsoft, Facebook, and Alphabet reached $1.2 trillion.

What Does Smart Tech Investment Look Like?

History tells us that the wisdom of investing in tech in a recession heavily depends on where the recession starts. The current landscape indicates that it can also vary from sector to sector.

Some tech investments, like cybersecurity, are likely to keep performing well; even in a recession, people and businesses will need to keep their data secure.

Similarly, watching for ongoing trends can signal a sector’s investment potential. A study by Ladders, Inc. found that nearly 15 percent of high-paying job opportunities are now remote, a significant increase from 2019’s 3.69 percent. Sectors that produce the tools that make remote work possible, such as video conferencing and project management software, are likely to remain safe investments.

It’s essential to avoid investments likely to lead to a reenactment of the 2001 dot-com crash. For example, cryptocurrencies have been sharply declining in value despite accelerating inflation and limited trade flow -- factors that should have the market booming. As more and more investors seem to realize that the profit they were expecting may never appear, the sector will likely continue losing value.

Investing in the Tech Industry in a Recession

Investing in tech during a recession can be an excellent decision if you understand current trends and make your choices wisely. Understanding the recession’s causes is essential to assess the tech industry’s stability accurately.

Look for companies that are expanding, especially those focusing on research and development. The recession will end eventually, so invest early in the companies developing what everyone will want on the other side.

Photo Credit:  mikeledray / Shutterstock

Devin Partida writes about AI, apps and technology at ReHack.com, where she is Editor-in-Chief.