With their bank accounts already battered by inflation, Americans are wondering if they can do anything to protect investment accounts amid recession fears. According to Tim Baker, CFA of Metric Financial, while no portfolio can truly be recession proof, bonds tend to perform well and certain industries can actually increase profits in a down economy.
“Businesses and services that consumers can’t live without make those industries recession-resistant, meaning they see fewer losses, and perhaps greater gains, when the economy takes a dive,” explains Baker, a Chartered Financial Analyst and founder of Metric Financial “However, when the economy rebounds, these same stocks may grow significantly slower.”
Utilities, goods transportation, discount retailers, grocery stores and healthcare typically fall into this category. But before moving money into these sectors, Baker encourages investors to review their long-term plan and remain steadfast on their goals.
To create an investment protection strategy, Baker answers questions about a recession:
What is a recession?
A recession is technically defined as two consecutive quarters of negative GDP growth. Technically, we saw that in early 2022, but the National Bureau of Economic Research never officially called it a recession because (a) it was very shallow and (b) the employment picture was just too strong.
How likely is a recession?
It is certainly a possibility as US economic growth has been waning since the end of 2022. Consumer spending and retail sales have been slowing, and more and more layoffs may be an indicator that the Federal Reserve has accomplished one of its goals in raising interest rates – breaking the back of the jobs market. Low unemployment tends to lead to high wage growth, which is supportive of higher inflation. Raising interest rates seeks to cool inflation and a too-strong jobs market was working against that goal.
What would a recession mean?
Unfortunately, people could lose their jobs. This is why we at Metric always encourage clients to have 3-6 months’ worth of income needs in cash. That gives them an emergency cushion while they look for a new job. But for investors, the result of a recession is less clear. Historically, there is a very low statistical correlation between the economy and stock market returns. Overall, stocks have a tendency to fall at the onset of a recession, but also tend to turn higher before a recession is over. But the average returns have historically been worse BEFORE a recession than during, and returns following a recession have generally been above the long-term averages. But caution is warranted in looking at the averages as returns are very recession-dependent. For example, during the recession of 1953, the S&P 500 returned +18%, but during the recession that started in 2007, it returned -37%. In many cases, the weaker the return during the recession, the stronger the return afterwards. (Source: Forbes)
What does all of that mean in today’s terms?
That is difficult to say since we have not yet entered a recession. But if we do, the S&P 500 peaked at the end of 2021 and is down about 14% since then (as of May 25, 2023), despite the rally we have seen in 2023 and since October of last year. (Source: Yahoo Finance)
What should investors do?
The future is impossible to predict. Stocks are more variable in their values than bonds or cash, but while the past doesn’t predict the future, they have also generated superior returns in the long-run. Remember the old adage: getting out of the market requires two decisions, not one: when to get out and when to get back in. People who get out seldom get back in.
Short-term income needs should be in more conservative places like bonds and cash.
Baker is bullish on keeping the majority of long-term investments in stocks and diversified with Exchange Traded Funds (ETFs).
“Timing the market has proven over time to be futile,” concludes Baker. “An advisor should review and change your allocation between stocks and bonds according to your personal projected needs, not based on a constantly fluctuating market.”
About Metric Financial LLC
Founded in 2018, Metric Financial, LLC is registered as an Investment Adviser with the State of Connecticut. Led by Chartered Financial Analyst Timothy Baker, the firm provides investment management services, comprehensive financial planning, debt management, estate planning, retirement planning, risk management and tax planning, among others. Baker conducts frequent educational sessions and public seminars on a variety of financial topics of interest to schools, business groups, and associations. For more information, please visit www.metricfin.com or call 860.256.5895