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Recession Odds Rising? ETF Strategies to Navigate the Waters
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Economists predict a 61% chance of a U.S. recession in the next 12 months, according to the most recent Wall Street Journal poll, as quoted on CNBC. A staggering 93% of corporate CEOs report preparing for a recession over the next 12 to 18 months, according to a recent survey from the Conference Board.
Despite these warning signals, the S&P 500 index is showing a rise of more than 10% in 2023. But Morgan Stanley believes that a sudden pullback in corporate earnings will put the brakes on a US equity rally, per a Bloomberg article, quoted on Yahoo.
Deciphering a Mixed Economy
The U.S. economy is currently in a strange and confusing place. Strong employment, robust consumer spending, and a rising stock market coexist with the threat of an impending economic downturn. The Fed faces has adopted the task of slowing things down, dampening sticky inflation without pushing the economy into a recession.
In this environment of cautious adjustment, some sectors display recession-like tendencies. News of high-profile companies conducting mass layoffs and significant bank failures points to economic instability. Contrarily, the low unemployment rate and robust consumer spending suggest healthy economic momentum. This divergence in signals is attributed to "rolling recessions," which occur when different sectors of the economy go through downturns at different times.
Some market-watchers anticipate that the Fed will pause its interest rate hikes, but the market appears to be pricing in the assumption that rates will decrease soon. However, a decrease in rates would only occur if the economy worsens considerably.
How to Win In This Situation?
A key strategy during a potential recession is diversification. This involves spreading your investments across different asset classes, industries, and geographies. It helps reduce exposure to risk, since a downturn in one sector or asset class may be offset by gains in another.
Bonds and Treasuries: Secure Investments
Bonds, particularly government treasuries, are traditionally viewed as safe havens during a recession because they offer predictable returns and are backed by the government. With the U.S. government cracking the debt ceiling deal for two years, now could be the time to bet on safe U.S. treasuries. WisdomTree Floating Rate Treasury Fund (USFR - Free Report) can be considered here. The fund yields 3.64% annually.
Value Investing: Finding Hidden Gems
During a recession, many high-quality companies may see their share prices fall, often more due to market sentiment than underlying performance. This is an opportunity for value investors. One should remember that the company's fundamentals should remain strong, despite the low share price. Invesco S&P 500 Enhanced Value ETF (SPVU - Free Report) has a Zacks Rank #2 (Buy).
Cash is King: Importance of Liquidity
Having liquidity is vital during an economic downturn. This means having access to cash or cash equivalents that can be used to invest when opportunities arise or to cover living expenses if income sources are affected. A solid emergency fund - typically covering 3-6 months' worth of living expenses - is a sensible preparation. Here, investors can bet on cash-like ETF PIMCO Enhanced Short Maturity Active ETF (MINT - Free Report) . It charges 35 bps in fees and yields 3.35% annually.
Defensive Sectors: A Likely Winner
“Look for more defensive areas of the market that let you stay invested, but at the same time, protect you a little bit as the market continues to experience volatility,” says Gargi Chaudhuri, head of iShares investment strategy, Americas, at BlackRock, quoted on that CNBC article. Invesco Defensive Equity ETF could be a good pick here.
International ETFs Deserve a Look
International equities ETFs have been on a tear this year. Invesco S&P International Developed Quality ETF (IDHQ - Free Report) charges 29 bps and yields 3.23% annually.
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Recession Odds Rising? ETF Strategies to Navigate the Waters
Economists predict a 61% chance of a U.S. recession in the next 12 months, according to the most recent Wall Street Journal poll, as quoted on CNBC. A staggering 93% of corporate CEOs report preparing for a recession over the next 12 to 18 months, according to a recent survey from the Conference Board.
Despite these warning signals, the S&P 500 index is showing a rise of more than 10% in 2023. But Morgan Stanley believes that a sudden pullback in corporate earnings will put the brakes on a US equity rally, per a Bloomberg article, quoted on Yahoo.
Deciphering a Mixed Economy
The U.S. economy is currently in a strange and confusing place. Strong employment, robust consumer spending, and a rising stock market coexist with the threat of an impending economic downturn. The Fed faces has adopted the task of slowing things down, dampening sticky inflation without pushing the economy into a recession.
In this environment of cautious adjustment, some sectors display recession-like tendencies. News of high-profile companies conducting mass layoffs and significant bank failures points to economic instability. Contrarily, the low unemployment rate and robust consumer spending suggest healthy economic momentum. This divergence in signals is attributed to "rolling recessions," which occur when different sectors of the economy go through downturns at different times.
Some market-watchers anticipate that the Fed will pause its interest rate hikes, but the market appears to be pricing in the assumption that rates will decrease soon. However, a decrease in rates would only occur if the economy worsens considerably.
How to Win In This Situation?
A key strategy during a potential recession is diversification. This involves spreading your investments across different asset classes, industries, and geographies. It helps reduce exposure to risk, since a downturn in one sector or asset class may be offset by gains in another.
Bonds and Treasuries: Secure Investments
Bonds, particularly government treasuries, are traditionally viewed as safe havens during a recession because they offer predictable returns and are backed by the government. With the U.S. government cracking the debt ceiling deal for two years, now could be the time to bet on safe U.S. treasuries. WisdomTree Floating Rate Treasury Fund (USFR - Free Report) can be considered here. The fund yields 3.64% annually.
Value Investing: Finding Hidden Gems
During a recession, many high-quality companies may see their share prices fall, often more due to market sentiment than underlying performance. This is an opportunity for value investors. One should remember that the company's fundamentals should remain strong, despite the low share price. Invesco S&P 500 Enhanced Value ETF (SPVU - Free Report) has a Zacks Rank #2 (Buy).
Cash is King: Importance of Liquidity
Having liquidity is vital during an economic downturn. This means having access to cash or cash equivalents that can be used to invest when opportunities arise or to cover living expenses if income sources are affected. A solid emergency fund - typically covering 3-6 months' worth of living expenses - is a sensible preparation. Here, investors can bet on cash-like ETF PIMCO Enhanced Short Maturity Active ETF (MINT - Free Report) . It charges 35 bps in fees and yields 3.35% annually.
Defensive Sectors: A Likely Winner
“Look for more defensive areas of the market that let you stay invested, but at the same time, protect you a little bit as the market continues to experience volatility,” says Gargi Chaudhuri, head of iShares investment strategy, Americas, at BlackRock, quoted on that CNBC article. Invesco Defensive Equity ETF could be a good pick here.
International ETFs Deserve a Look
International equities ETFs have been on a tear this year. Invesco S&P International Developed Quality ETF (IDHQ - Free Report) charges 29 bps and yields 3.23% annually.