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In 1991 Billy and Akaisha Kaderli retired at the age of 38. Now, into their 4th decade of this financially independent lifestyle, they invite you to take advantage of their wisdom and experience.

Lance Roberts Market Report

Billy and Akaisha Kaderl

Recession Coming?

“Is a recession coming?” That is the question currently.

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 builds.

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 all.”

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 recessionary drag.

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 Announcement

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 Risk Rising:”

“The 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.

In reality, 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.

Today, we are once again seeing many of the same early warnings. If you have been paying attention to the trend of the economic data, the stock market, and the yield curve, the signs are becoming more pronounced.

Investing In A Recession

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 time.
• Are dividend-payers and avoid high leverage.
• Have free cash flow and strong operating margins.
• Avoid companies dependent on consumer spending, have high cash burn rates or have negative incomes and earnings.
• 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 your discipline.

The views expressed by Lance Roberts are not necessarily those of RetireEarlyLifestyle.com

Retire Early Lifestyle appeals to a different kind of person – the person who prizes their independence, values their time, and who doesn’t want to mindlessly follow the crowd.

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