A friend and I were discussing the market and economy the other day, and he emphatically stated, “There will definitely be a recession.”
He’s not alone in his thinking.
Nearly everyone with an opinion on the matter has come to the same conclusion. But anticipating a recession may be like expecting the Mets to win the World Series. I wonder if we’re all waiting for something that is not going to happen.
I don’t come to that conclusion lightly. In fact, like most people, I said in January I believed we would have a recession, albeit a mild one, sometime this year.
But I’m questioning that idea right now.
Recession in 2023?
While inflation is still too high, GDP did grow in the first quarter. Growth wasn’t exactly white-hot at 1.1%, but it was positive. Importantly, it’s tough to have a recession when unemployment is at record lows. And it seems that everyone is participating.
The unemployment rate for African Americans, which is usually higher than that of other groups, was 5%, a record low. The unemployment rate for women is the lowest it’s been in 70 years. And suffice it to say, in 1953, there weren’t as many women who wanted to be in the workforce.
Wages are climbing as well.
Generally speaking, anyone who wants a job has one, they are probably making more money than they did last year and most can likely easily switch their jobs if they want to.
It’s hard to have a recession under those circumstances.
Furthermore, the stock market, which is a forward-looking indicator, is up year to date.
After an abysmal 2022, the S&P 500 has gained more than 8% this year. Meanwhile, the Nasdaq is up nearly 17%.
It may not feel like it because the market has been choppy lately – especially with the news of various bank failures – but so far, the market is putting in a very good performance in 2023.
If we look at how stocks are performing, we can see that it suggests a recession is not imminent.
But it’s not all clear skies ahead. This market and economy don’t feel good.
Inflation is pinching everyone’s budgets. Several banks have failed, and there is concern that more will follow.
Plus, the debt ceiling is a big wild card. If the president, House and Senate can’t get together on a deal and the government shuts down as a result, there will be some real economic pain inflicted on the American people.
Despite the Federal Reserve lifting rates, the bond market is not following. Ten-year Treasurys still yield around 3.5%, signaling that rates should fall. And the futures market predicts a 70% chance of a Fed rate cut in September.
Energy prices have come down in recent weeks – another sign of weaker economic output.
And, of course, the news that comes out on a daily basis with random (and not random) acts of violence, ineptitude in Washington and geopolitical concerns do nothing to instill confidence.
How to Prepare
So how should you play it?
For your safe and short-term funds, there are few better deals than Treasury bills right now. If you’re concerned about a U.S. debt default, you can always buy a certificate of deposit instead.
If you have money to put to work in the stock market, don’t wait. It may feel like it’s not the right time, but that was the case in early 2009 when the economy was still a mess. And yet that was precisely the right time to invest.
Furthermore, you can’t time the market. By the time you and others believe we have the all-clear signal, the market will be much higher than it is now.
Again, the market looks forward. So if the economy is better, the market will have already moved.
I particularly like the energy sector and metals. If we avoid a recession, those sectors and others should do well. And because the energy sector has fallen over the past few weeks, there are a lot of cheap energy stocks.
I think regional banks are also interesting and are perhaps offering the buying opportunity of a lifetime. Their prices have gotten smashed, and there are quality banks that are paying yields over 7%.
This is obviously a volatile sector right now, so if you put money to work in the regional banks, you need to be prepared for a wild ride. But I expect investors to be well rewarded over the long term.
Lastly, remember the best time to buy a stock is when it feels uncomfortable. That means you’re probably getting a great price because so many others have sold it.