Recession-Proofing Your Finances: How to Prepare for a Potential Economic Slowdown
The US was on track to reduce inflation after the Federal Reserve increased interest rates to almost 5% in a single year, at least until the sixth largest bank in the US suddenly couldn’t return deposits to account holders. This shock to the banking system forced the Biden Administration to provide an enormous amount of liquidity and guarantee account holders that their bank deposits, no matter the size, will be okay. The turmoil in the banking system could stem the US into a small recession with only a 35% chance of it happening at all.^1 And, if it does happen, it will likely be limited to layoffs and a slowdown in economic growth - something the Fed was attempting to create this whole time but short of saying it out loud.
What are investors to do at the beginning of a recession, should it arrive, and how should investments be allocated accordingly?
The last recession was the “Great Recession” in 2007-2009 causing a drop of 50% in US stocks during that period. Unlike that recession, this time, should it arrive, it will be less impactful, according to most economists. The banking system has already survived the last recession and has responded so far fairly positively after the US gov stepped in to manage this crisis early. Should a recession arrive, it will likely be in the form of corporate layoffs and a slowing in demand for housing, oil & gas, and other commodities. Value stocks that generate a dividend will provide investors with cash flow during this period, putting them in an even better position when the market fully recovers.
Government bonds are the “safest” asset in the world but are also the primary cause of the current banking crisis. These bonds are only guaranteed at maturity and this is a problem if cash depositors want their deposits back before then. Some of these banks are now being accused of bad planning. Knowing the Fed was raising rates, it’s unknown why banks didn’t prepare accordingly.
BlackRock says this might be a golden time to own bonds. The impact on the price of bonds due to Fed action this year might reverse course should the glimpse of a recession arrive. It’s important to monitor potential developments but this also serves as a validation of why investors should continue to hold bonds.
Lastly, with the Russian invasion not slowing, and a further destabilizing world, commodities, including agriculture, gold, and oil will likely continue to advance in price despite any drop in demand due to a recession and should make a small part of any diversified portfolio.
At Eureka Wealth Management, I help my clients achieve their financial goals through investment selection and diversification depending on their objectives and market conditions. I also do retirement planning and tax/estate strategies. Call for a free, initial consultation at (760)537-0791 or at eurekawealthmanagement.com.
Sources:
FT 3/16/23: “Goldman Sachs raises odds of US recession amid banking instability” link