A lot of investors have given up on the economy making it through the coming year without hitting a significant speed bump . . . the dreaded “hard landing” that tells the Fed that interest rates have gone too far.
I’m still on the fence. On one hand, we’ve explored the ways a tightening cycle feeds corporate innovation, creating companies like Apple (AAPL) and Starbucks (SBUX) in the process. But every winner leaves a lot of disrupted industries in its wake.
Pain is the mother of profit. And if you’ve lost sight of the profit on the far side, there’s no reason to expose yourself to additional pain. Comfort yourself. Shield your existing assets from risk.
That’s what almost everyone on Wall Street instinctively does when they feel the economic storm clouds coming. Hunker down. Unwind vulnerable positions and move remaining wealth to shelter where it’s relatively safe.
To do that, you need to liquidate. Pull the plug. People are clearly pulling the plug wherever they can . . . more than half of the members of the S&P 500 are in formal bear market territory and about a third of the index is down 30% or more.
Say You See A Recession Coming
Here’s a hard truth: if you aren’t ready to face a recession in the coming year, don’t bother holding onto your stocks. Sell and go away.
That’s the only recession indicator that really matters. If you’re worried about keeping your job, now is the time to conserve cash while it’s coming in. Keep that cash safe, where you can get to it when the paychecks stop.
And if you’re worried about paying the bills, make sure to set a little extra aside for inflation. Winter is finally over, but it was a grueling season if you needed to heat the house with fossil fuels. Guess what? Winter is coming again in about 6 months. Fill the oil tank now because prices aren’t going down.
For those who rely on their investment portfolios for current income, bonds are not going to keep up with inflation, which turns their reliability into a trap . . . but it’s better than cash. At least you get a little interest to reduce the bite inflation will take away.
Stocks, on the other hand, can outperform inflation. They can also fall further before they start outperforming again. You need confidence in that future outcome before you have any chance of achieving it. If you’ve lost that confidence, just go. Come back later.
Of course, there’s a middle path. If you need income, this is the time to own dividend stocks. My Value Authority is stuffed with them, many paying higher yields than Treasury bonds and are only minimally less reliable.
They pay dividends as long as you hold on. That means you don’t sell. And if you don’t sell, the stock price is really only there for your heirs to worry about . . . all you want is the dividends to keep flowing.
The kind of companies that pay dividends don’t buckle in a recession. Most of the ones that carry reasonable yields (3-5%, a little better than bonds) are fixtures of the global economy. They aren’t going away. If they do, bonds are not going to be a lot of comfort anyway.
So if you’re convinced a recession is ahead, that’s what big money on Wall Street does. Find the biggest yield that you can be confident won’t evaporate in the coming year and park there. No regrets. No shame.
And then, as the skies brighten and you get your nerve back, you can tiptoe back into risk stocks. But maintain a reasonable cash flow portfolio . . . enough income and tangible assets to keep you afloat through a difficult year.
The average recession runs 11-15 months. After that, things get better again. People find new jobs. Cash starts coming in. The stock market recovers.
That’s how long you need to protect your family from the economic tides.
From Boom To Recession And Back
But maybe you’re still confident in the future of American business . . . or would be, if Wall Street didn’t keep you focused on the gloom. I remember back in 2003-4 when people kept talking the post-911 economy down just to score points.
Those who listened to that gloomy story didn’t recover from their dot-com trauma until it was too late to buy the dip. Warren Buffett rejoiced at the opportunity to build his portfolio at a deep discount. But when you miss the boom, all you remember are the crashes in between.
When people argue over what’s really going on in the economy, I look at the evidence of my own eyes and then I compare it to the big data that reflects conditions elsewhere.
Mall parking lots are filling up again. Planes are packed. Hotel lobbies are buzzing. If you’re remodeling your house, contractors are booked into September . . . and reluctant to take on work beyond that point because they’re eager for a break.
If things are different in your part of the country, let me know. Around here, the real complaint is that everyone is too busy. There’s too much work to do. We’re all running too hard.
That’s a fast economy. Normally it would feel like a boom. Unfortunately, inflation is such a drag that we’re running too hard and not even keeping up. We’re working too hard and feel the endless pressure of falling behind.
Does that sound familiar? That’s what inflation does. A little is invigorating. Too much is poison. And that’s why the Fed is so desperate to cool things off a little.
“Cooling things off” is code for an economic slowdown. Sometimes we just get a break. Sometimes the plane runs out of gas and we get a hard landing . . . a recession.
What does the data tell me? I have to say, everyone who was talking about “the yield curve” pointing at an immediate economic crash has gotten awfully quiet.
Parts of the curve inverted back in August. Nobody mentioned it. Other parts flipped in February. The Fed literally laughed it off as just what happens when interest rates start moving again.
Then a few key parts of the curve inverted about 6 months ago and investors went crazy at what they were told looked like an inevitable recession signal.
Here we are and I’m looking at a curve that’s healthier than it was going back to February. Nearly all of the inversions have resolved. The curve itself is steeper (healthier) than it has been in over a year.
If you were talking about an inverted curve being a doomsday trigger, how do you feel about it now?
There’s always a recession ahead. If it makes you nervous, take steps to mitigate the disruption it will cause you and your loved ones. But if you want to be an investor, you need courage as well as caution.