Investing on the Edge of a Recession

Posted by Jacob Radke

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What is a recession?

A recession is a sustained period of economic decline. There are several ways of determining what that means.

For some it means two consecutive quarters of GDP contraction and an assumption that it will continue. For others it means unemployment must go up. For others it means manufacturing has to substantially decline. And for some all of the above have to occur.

Economic decline is subjective to what you want it to be. And you only know it occurred after the fact.

We are in a weird balance between being in a recession and not being in a recession.

The housing market has clearly cooled.

The job market is softening.

Oil prices are back to near multiyear lows.

The banks are/were failing, and the Fed is still raising rates.

S&P 500 companies beat analyst expectations, while still performing a -2.2% year over year decline in earnings.

But the American consumer still has savings, is still good on debt, and has low delinquency rates on that debt.

The job market is still incredibly robust too, and in April we added more job openings.

The chances of a recession are incredibly high, yet if you walk down the street you wouldn’t know it.

How long will it take for us to start feeling it and will it happen anyways.

I believe in order for the stock market to maintain/continue it’s rally we need to achieve a soft landing. How outlandish is that though? I don’t think in our history we have seen a yield curve inversion, especially for this long and this deep, that hasn’t been followed by a recession within the next twelve months. Yet when you look at it, twelve months ago we had a inverted yield curve, and two consecutive quarters of negative economic decline; at the same time having two jobs for each unemployed person.

Recession? No, definitely not.

Recession in the future? Probably. But that is the word everyone is unsure about.

Your money is probably safe in the bank. Doesn’t instill a lot of confidence.

The debt ceiling will probably get raised. Of course now it is actually in the process of getting raised.

A recession is probably 6 months away, but its been 6 months away for 18 months now.

A recession is certainly probable. After all the economy typically see recession once out of every 5 years or so.

Will we actually achieve a soft landing?

If we achieve a soft landing, wonderful. But is it possible?

It’s certainly possible to conclude that several parts of the economy have not seen a soft landing. Housing, did not hit a soft landing. Inventory and vacancy have damaged cash flow and prices. Mortgage offices are seeing mass layoffs.

You can also say tech didn’t see a soft landing, advertising substantially slowed. Layoffs and earnings declines showed up everywhere, and still are.

But inflation, manufacturing, consumer spending, GDP, and labor all might achieve a soft landing which would still be bullish for the stock and bond market.

How to invest on the edge of a recession, but also not on the edge of recession?

All I can say is this is one of the hardest parts of allocation you will ever experience.

If you position for a soft landing you could see substantial upside, but also substantial downside, if something breaks.

If you position for a hard landing you could miss the soft landing scenario, but protect yourself if something does in fact break.

Honestly the best combination is a little of both. If you do that you will diversify the risk in either scenario and be happier with the outcome. Don’t be a hero in this environment, leave that to the hedge funds.

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