Written by Hi, it’s Dre Griggs with Obsidian Wisdom. Today, we throw our hat into the recession debate and tackle the question: Are we in a recession? And if so, what should you do about it? For those who are retiring, investing, or just keeping their money in places that aren’t completely safe, you’re likely seeing all those articles discussing the recession in the news.
Just this morning on my LinkedIn, I came across an article by Reva Gold about U.S. growth fears, which are shaking up a lot of concerns in the market. She lists several indicators that usually signal we’re in a recession. Let’s take a closer look at those.
Market Indicators
First up is the VIX Index, known as Wall Street’s Fear Gauge, which is at its highest level in over four years. Meanwhile, the S&P 500 and the NASDAQ 100 have dropped to their two-year lows, which is typically a concerning sign. Recent data shows that the U.S. growth market is much weaker than anticipated, and interest rates remain quite high as the Fed tries to aim for a soft landing. However, many are worried that this soft landing could turn into a hard landing.
Soft Landing vs. Hard Landing
For those unfamiliar, a soft landing refers to a scenario where we have high inflation but low unemployment. Everyone has money to spend, so the Fed raises interest rates to curb spending. Unfortunately, this can lead to job losses as money becomes less accessible. As spending decreases, inflation begins to drop, and people may have to settle for lower-paying jobs.
In contrast, a hard landing occurs when the Fed lowers rates too late, causing a recession. If they wait too long, we could fall into a depression, similar to the 2008 Great Recession. During that time, credit dried up, and banks weren’t lending money, resulting in a deep recession. It wasn’t until the Fed lowered interest rates to 0% and started quantitative easing—basically printing money—that the economy began to recover.
Current Economic Climate
Today, the Fed president of Chicago said that if the economy declines rapidly, the Fed will step in to fix it, which usually involves printing money or lowering interest rates.
Now, let’s look at some specific sectors. The “Magnificent Seven”—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla—represent companies at the forefront of the AI revolution. Recently, these stocks had their worst day on record, primarily because companies tend to cut back on research and development during downturns. This impacts the growth of the AI industry, which requires significant investment.
Additionally, Japan’s index dropped 12%, marking its steepest decline since 1987, adding to the concerns.
Recession Indicators
Business Insider points to two recession indicators with a strong track record. The first is the Sahm Rule, which states that the U.S. economy is in a downturn when the three-month moving average of the unemployment rate rises by 0.5% from its 12-month average. As of July, the unemployment rate rose to 4.3%, up from 4.1% in June and 3.4% in April 2023. According to the Sahm Rule, we are already in a recession.
Critics of the Sahm Rule argue that it doesn’t consider rising labor participation rates, which could elevate the unemployment rate without indicating a recession. However, even when looking at year-over-year growth in unemployed persons, we see that unemployment has increased by 14.5% year over year. Historically, this trend has correlated with recessions.
What Should You Do?
Given the signs pointing to a recession, the question arises: What can you do? Here are three choices regarding your investments in the stock market:
1. Build a Diversified Portfolio
If you’ve already built a diversified portfolio designed to perform well in various economic environments, you may not need to change anything. An example of such a portfolio is the Permanent Portfolio by Harry Browne. The portfolio is built on the idea that while the future is uncertain, the economic cycles are well know.
As a result, you could invest in stocks during times of economic prosperity, cash during recessions, gold during inflation, and long-term treasuries during times of deflation. A portion of your portfolio is likely to do well in a recession, while another part will thrive in economic growth. So, sit tight.
2. Take Defensive Positions
Consider shifting to more defensive sectors. During a recession, three sectors typically perform well:
- Healthcare: We always need medical care, regardless of the economy. Healthcare stocks tend to be resilient.
- Consumer Staples: People will always spend money on food and essentials. Retail giants like Walmart often outperform during recessions because consumers seek out budget-friendly options.
- Utilities: Energy is another necessity. Even when money is tight, people prioritize paying their utility bills.
These sectors can provide some stability during economic downturns.
3. Create an “On-Sale” List
An advanced strategy involves keeping a list of stocks you believe are undervalued. Just like in real estate, when prices drop, savvy investors get excited about the opportunity to buy low. Many people panic and sell their stocks when prices fall, but if you have a list of companies you believe in, you can buy when their prices drop.
For example, let’s take Coca-Cola. According to a recent analysis from Morningstar, its fair market value is estimated at $60, but it’s currently trading at $68. If the price drops below $60, it would be a buying opportunity for those who have confidence in its long-term value.
Final Thoughts
The stock market can be tricky, especially during times of uncertainty. Remember, timing the market is difficult, and missing out on growth days can hurt your overall returns.
If you’re looking to weather potential recessions, focus on defensive sectors, maintain a diversified portfolio, and keep your eye on undervalued stocks.
While the current landscape may seem daunting, staying informed and making strategic choices can help you navigate these turbulent times.
Stay safe and enjoy life.
Forbes: Unfailing Recession Signal Ignites Stock Plunge
Reuters: Wall Street plunges as US recession fears jolt global markets
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