Are we in a recession yet? Here are the Top 5 investment strategies to consider in anticipation of a recession

While the US has not yet declared a recession, there is a significant expectation for one in the near future. This anticipation has already caused a sizeable drop in asset prices, such as US stocks (S&P 500) falling by 18% in 2022 and national real estate (Case-Shiller index) decreasing by 5% since its peak in June 2022.

Despite this, we anticipate that the upcoming recession will be brief and relatively mild. This is because it is being intentionally created by the Federal Reserve to temper the extremely frothy economy and high inflation rates in 2022.

The Federal Reserve’s efforts to slow down the economy by increasing interest rates have not been entirely successful so far. While there has been a decrease in purchases of fixed assets such as houses and financial assets such as stocks, US consumers are still spending generously on services, including travel and restaurants, as they emerge from the COVID-19 lockdown. With a fully employed workforce and strong consumer spending, we predict that the US economy will continue to perform well for the remainder of 2023.

Investing prior to even a mild recession requires a distinct strategy compared to investing during or after a recession. Here are the Top 5 investment strategies to consider in anticipation of a recession:

  1. Stay the course: A recession is akin to a hurricane, causing fear and anxiety, but is typically brief. Therefore, it’s crucial to remain on course and avoid making impulsive decisions during a recession. Timing the market can be risky, and historical data shows that the stock market tends to rebound over the long-term. One common way that investors lose money in the stock market is by purchasing stocks when they feel comfortable and selling when they feel uneasy due to a negative headline. In our view, bad news and widespread fear can actually benefit investors, as they can lead to stock bargains in the market. It’s important to note that a stock’s price should reflect the long-term cash flow of a business over many years into the future, rather than just its earnings in the next 12 months.
  2. Rebalance your portfolio: Following the bear market in 2022, some of your investments’ value may have significantly decreased. It’s necessary to rebalance your portfolio by selling some investments that have performed well and using the proceeds to buy investments that have declined in value. This can help you maintain a diversified portfolio and manage risk.
  3. Consider dollar-cost averaging into a depressed and volatile market:  A strategy to minimize the impact of market volatility is dollar-cost averaging. It involves investing a fixed amount of money regularly over time, regardless of market conditions. This can help smooth out the impact of market volatility and potentially result in lower average costs over the long-term.
  4. Diversify your portfolio: For those who are close to or at retirement age, it is vital to diversify your portfolio by investing in a mix of stocks, bonds, and other asset classes. This can help spread out risk and minimize the impact of a recession on your overall portfolio. Since interest rates have climbed back up to 4-5% level in recent months, consider fixed-income investments like bonds, as they can provide a stable source of income during a recession.
  5. Seek professional advice: If you’re unsure how to navigate the market after a bear market downturn, seek professional advice from a financial advisor. A professional can help you develop an investment strategy that aligns with your goals and risk tolerance.

The Bottom Line

Keep in mind that investing in the stock market can be counterintuitive. If you get scared when others are fearful, you won’t make money in the stock market. Investing involves risk, and past performance is not a reliable predictor of future outcomes. Therefore, it’s essential to do your due diligence, diversify your portfolio, and have a long-term investment strategy.

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