“Is a recession coming?” That is the
A few weeks ago, the mainstream media, Wall Street, and the Fed suggested the
economy was strong and “no recession” was
visible. Such may have been the case until Walmart and Target reported their
earnings for the first quarter noting a sharp drop in revenue and inventory
Those comments changed everything. Suddenly, not only is a recession coming, it
may be already here. According to a Quinnipiac poll, many Americans think the
economy is heading into a recession.
“The Quinnipiac University Poll found
that 85% think
it is likely or somewhat likely there will be an economic recession in the
next year amid fears of slowing growth and runaway inflation. Only
8% think it is ‘not so likely,’ and 4% don’t see a recession happening at
As Quinnipiac concluded:
“Americans believe a recession is not a
mere threat, it’s a looming reality,”
Don’t overlook the importance of that poll. Consumption makes up 70% of the
economy. If Americans think a recession is coming, they will begin to contract
spending and shift behaviors to prepare for a downturn. Ironically, those
actions cause the recession to occur.
But it’s not just consumers. CEOs are also increasingly downbeat, which means
less hiring, increased layoffs, and less capital spending, contributing to a
The chart below combines the CEO and Composite Consumer Confidence measures. As
shown, previous downturns in both measures tend to denote recessionary outcomes.
Here is the problem, we won’t know for sure until it is too late.
You Can’t Wait For
The most considerable risk of investing during a recession is putting a
“recession investing strategy” into place at the right time. As I wrote in “Recession
problem with making an assessment about the state of the economy today,
based on current data points, is that these numbers are only “best guesses.” Economic
data is subject to substantive negative revisions as data gets collected and
adjusted over the forthcoming 12- and 36-months.
Consider for a minute that in January
2008 Chairman Bernanke stated:
“The Federal Reserve is not currently
forecasting a recession.”
In hindsight, the NBER, in December
2008, dated the start of the official recession as December 2007.
If Ben Bernanke didn’t know a recession
was underway, how would we?”
Such is the most significant risk to investors. The chart shows the S&P 500 from
1960 to the present. Each blue dot is the market’s peak before the onset of a
recession. The yellow triangles are the official NBER recession announcements.
The issue to investors is evident. In 9 of 10 instances, the
S&P 500 peaked and turned lower before the recognition of a recession.
The decline from the peak was considered “just
a correction” as economic growth remained robust. Therefore, investors
didn’t adjust their strategy to invest during a recession.
however, the market was signaling a coming recession in the months ahead. The
economic data didn’t reflect it as of yet.
The problem is in waiting for the data to catch up.
As noted in this week’s MacroView,recession
investing can be dangerous, particularly when valuations across all asset
classes are elevated. However, there are some steps to take to ensure you are
prepared to weather increased volatility.
Have excess emergency savings, so
you are not “forced” to sell during a decline to meet obligations.
Extend your time horizon to 5-7 years as
buying distressed stocks can get more distressed.
Don’t obsessively check your portfolio.
Consider tax-loss harvesting (selling
stocks at a loss) to offset those losses against future gains.
Stick to your investing discipline
regardless of what happens.
Once you get prepared, what investments do well in a recession?
“A recession is a good time to avoid
speculating, especially on stocks that have taken the worst beating. Weaker
companies often go bankrupt during recessions, and while stocks that have
fallen by 80%, 90%, or even more might seem like bargains, they are usually
cheap for a reason. Just
remember — a broken business at an excellent price is still a broken
business.” – Motley Fool
That is very true. To make money in a recession, focus on companies that:
Have consistent earnings growth over
Are dividend-payers and avoid high
Have free cash flow and strong operating
Avoid companies dependent on consumer
spending, have high cash burn rates or have negative incomesand
Invest incrementally using lower prices
to build positions.
Lastly, don’t forget about bonds that
offer a haven during volatile market environments.
Investing during a recession is not easy due to high volatility, falling prices,
and negative media headlines. However, it can be very profitable given a
well-thought-out strategy, a longer-term timeline, and an ability to stick to
The views expressed by Lance Roberts are not
necessarily those of RetireEarlyLifestyle.com