IN-DEPTH: What Financial Analysts Are Recommending for Investing in a Recession

IN-DEPTH: What Financial Analysts Are Recommending for Investing in a Recession
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, on April 14, 2023. (Brendan McDermid/Reuters)
Andrew Moran

The recession has become the talk of the town again in the U.S. economy and financial markets, with many leading downturn indicators flashing red.

In March, The Conference Board’s Leading Economic Index slumped to its lowest level since November 2020, declining by 1.2 percent and deepening into contraction territory.
The spread between the two- and 10-year Treasury yields, which has forecast nearly every recession since the Second World War, settled the April 20 trading session at negative 60 basis points. The gap has widened since July 2022. The Federal Reserve’s preferred recession measurement—the three-month and 10-year yields—finished the session at negative 158 basis points.
Minutes from the Federal Reserve’s Federal Open Market Committee (FOMC) policy meeting in March revealed that central bank economists expect a recession later this year as the fallout from the banking turmoil spreads throughout the national economy.

Other economists and market experts agree. A recent Marquee QuickPoll for Goldman Sachs, for example, revealed that 53 percent of investors expect a recession this year.

“I believe that a near-term recession is more likely than unlikely. It will be very difficult for the Fed to engineer a soft landing for the economy and still win the battle to stem inflation,“ Robert R. Johnson, a professor of finance at Creighton University’s Heider College of Business, told The Epoch Times. ”The problem with recessions is that we don’t know we have entered one until after the fact, and we also don’t know we have exited one until after the fact.”

But for many Americans, the recession might already be here.

According to the CNBC All-America Economic Survey, 66 percent of Americans think the United States is headed for a recession or is already in one. Moreover, a January Morning Consult study found that 46 percent of U.S. adults believe the nation is entrenched in a recession.
How should investors prepare for this environment if a recession is on the horizon or has arrived?

Navigating the Markets

Despite bank failures, credit contraction, and tightening lending standards that might slow the economy, this “does not mean you can’t make money in stocks,” according to Nancy Tengler, the CEO and CIO of Laffer Tengler Investments, in a note.

Johnson thinks recessions could be an opportunity to enter the market or build on existing positions “as stocks are selling at prices below previous highs.”

The 'Wall Street Charging Bull' statue in New York City, on July 23, 2020. (Michael M. Santiago/Getty Images)
The 'Wall Street Charging Bull' statue in New York City, on July 23, 2020. (Michael M. Santiago/Getty Images)

What exactly should you be looking for in today’s climate?

According to Ben Fraser, the CIO of Aspen Funds, it is paramount for investors to possess “diversification” in their portfolios.

“Having diversification across multiple investment asset classes and strategies will soften the impact of a recession,” Fraser explained to The Epoch Times.

Michael Collins, the founder and CEO of WinCap Financial and professor at Endicott College in Massachusetts, shares this recommendation about diversification. He told The Epoch Times that investors need to concentrate on “diversified, long-term investments and seek out deflation-resistant, stable investments.”

“This should include investments in blue-chip stocks, bonds, and low-risk mutual funds,” he said. “Adding gold and other precious metals can also be beneficial as a hedge against inflation and market declines.”

Investment diversity has been the go-to recommendation for many financial experts, but the limited research on this subject suggests that only a third of investors ensure their investments are diversified.

At the same time, not everyone is in lockstep with diversification, including billionaire investor Warren Buffett, who asserted that the strategy “makes very little sense for anyone that knows what they’re doing.”

“It is a protection against ignorance,” Buffett said.

Investors can also shift their investment portfolios to defensive sectors “that are less affected by slowing economies,” says Richard Gardner, the CEO of financial technology firm Modulus. This includes health care, consumer staples, and utilities.

It could also be a perfect time to “investigate the financials of your investments,” Gardner told The Epoch Times.

“Stick with companies that have the balance sheet and cash reserves to make it through the storm and come out the other side,” he noted. “This is particularly valuable when taking a long-term approach to investing.”

With governments worldwide investing significant taxpayer dollars in the green energy industry, even as economies might be heading into a recession, Tengler thinks this could be an exceptional trading opportunity.

Tengler has picked potential investment options for green tech, metal, miners, and hydrogen.

“We also like the clean-energy commodities and have recently added to some of those names as well as energy yesterday and continue to add to consumer discretionary,” she stated. “Focus on reliable earners with great, seasoned management teams.”

Bonds and Gold

The global bond market has been volatile over the last 18 months, whether in the U.S. Treasury arena or the U.K. gilts. Heading into 2023, the Barclays Global Aggregate Bond Index—a benchmark of about $70 trillion of sovereign and corporate debt—had tumbled nearly 5 percent since 2021. But many of these indexes have rebounded so far this year, such as the Vanguard Total Bond Market ETF (3.2 percent), iShares Core U.S. Aggregate Bond ETF (3.2 percent), and SPDR Portfolio Aggregate Bond ETF (3 percent).

For years, standard investment advice has been to invest in bonds during a recession since these instruments offer regular cash flow, a predictable fixed income, and a reduced chance of losing your principal.

Long-term bonds have been a reliable pick during five of the deepest recessions in the last century, says John Rekenthaler, a member of Morningstar’s investment research department.

“Through each of the five deepest recessions during the past 100 years—two of these have occurred within the past 20 years, so this is not just ancient history—long government bonds not only turned a profit but also outdid Treasury bills,” he wrote in a report. “On four out of those five occasions, equities crashed. Long Treasurys have therefore offered strong protection against stock market declines caused by economic weakness.”

In addition, it is worth noting that interest earned from Treasurys and money markets are not subjected to state and local taxes, although they face federal levies. By comparison, a certificate of deposit (CD) offers higher rates but will be slapped with federal and state income taxes.

For the broader economy, Morningstar analyst Sandy Ward recently stated that the bond market is flashing red, signaling recession, rising credit stress, and weakening economic conditions.

Gold is another safe-haven asset put forward by financial experts.

The yellow metal has trended higher since November on a weaker greenback and the Federal Reserve’s easing monetary policy prospects. Year to date, gold prices are up nearly 10 percent and recently flirted with the August 2020 record high of $2,069.40.

Gold is typically sensitive to interest-rate movements because they can affect the opportunity cost of holding non-yielding bullion. The buck’s performance can make dollar-denominated commodities more expensive or cheaper for foreign investors.

The other factor has been weakening economic data, says Stephen Akin, a registered investment advisor at Akin Investments.

“The primary fundamental event that propelled gold well above $2,000 was weaker U.S. economic data,” he told The Epoch Times. “This data suggest that the Federal Reserve could certainly consider slower rate hikes and a pause of rate hikes sooner.”

Gold bars at Korea Gold Exchange in Seoul, South Korea, on Aug. 6, 2020. (Kim Hong-Ji/Reuters)
Gold bars at Korea Gold Exchange in Seoul, South Korea, on Aug. 6, 2020. (Kim Hong-Ji/Reuters)
Collin Plume, the CEO of Noble Gold Investments, would not be “surprised if 2023 saw a new record high for gold prices” as the global economy “teeters on the edge of recession.”

Emerging Markets

Some experts believe it would be advantageous to consider emerging markets, such as Brazil, China, and India—with or without a recession.
This could be a prudent step, considering that the International Monetary Fund (IMF) forecasts that emerging markets and developing economies will expand by 3.9 in 2023 and 4.2 percent in 2024.

“If we avoid a recession, it may be worthwhile for investors to look more closely at emerging markets which often can provide higher returns but assume a greater risk,” Gardner stated.

Stocks with “upside potential” should be assessed as options for a recession-era investment strategies, including riskier assets.

“This could include investing in riskier assets such as small-cap stocks, venture capital, and commodities,” Collins said. “Investors should also consider adding international investments to their portfolios and investing in sectors that are expected to grow in the long-term, such as technology and healthcare.”

According to Emily Leveille, the portfolio manager and managing director at Thornburg, traders should reconsider international equities, purporting in a note that valuations are generally lower than in the United States.

“Over the past 10 years, foreign markets have traded at a discount to the U.S. that has widened since COVID,” Leveille wrote in a research note last month. “If the U.S. market indeed falls into recession this year, and equity prices contract further, the ex-post valuation disparity will have shown itself to be even wider.”

A peaking U.S. dollar, lower energy prices, and China’s economic reopening would be other reasons to incorporate emerging markets into portfolios.

Where Is the Market Headed?

Despite everything that has transpired in the first few months of the year—from higher interest rates to banking turmoi—the leading benchmark indexes have held steady.

Year to date, the Dow Jones Industrial Average is up 2 percent, the Nasdaq Composite Index has rallied more than 15 percent, and the S&P 500 Index has surged nearly 8 percent.

So, where does Wall Street think the market is headed for the rest of the year?

The present risks to the equities arena are earnings cuts and valuation adjustments. Monetary policy could also affect the direction of stocks. Investors are penciling in one more rate hike at the May FOMC policy meeting and planning for rate cuts later this year and heading into 2024 in response to slowing economic conditions, according to the CME FedWatch Tool.
A February 2023 Reuters poll found that strategists expect the S&P 500 will finish the year at 4,200. The index has been trading at around 4,100.

But while industry observers are always on the hunt for trends, the rest of the year may be a time for the stock market to be stuck in “limbo,” says Jurrien Timmer, the director of the global macro in Fidelity’s Global Asset Allocation Division.

“Indeed, the cycle seems to be meandering without a clear inflection,” he wrote, adding that fund flows are displaying “neither hope nor despair.”

“A period of ongoing base-building may lie ahead for the market,” he said. “For investors, the key for now is patience.”

Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."
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