The next recession is coming, but not for at least 6 months.
As many of you know, I maintain an econometric model that is designed to forecast the onset of recessions and the end of recessions. The model has two time frames – 6 months and 12 months. Today the model gave its first recession warning since 2007, with a 12 month lead. The model has an 87% accuracy score since 1957. That means it’s not foolproof, but it’s pretty good. So, when is the next recession coming?
What should an investor do?
The short answer is… nothing. But the relevant answer is that investors should now begin in earnest to get their contingency plan updated and ready for the next recession. I’m advocating preparedness rather than initiating a defensive strategy. If you don’t have a contingency plan you are left with “gut instincts” and emotions to drive your investment decisions. This is not the best way to go.
I am an advocate of playing defense when it’s warranted. Buy & Hold is great when the economy is growing and the market is rising, but it has the unfortunate side effect of costing the investor time and money while the recession and bear market evolve. As I’ve noted many times, bear markets that are linked with economic recessions are extremely harmful for investors. While it’s true that in every case, the market and the economy comes back, and investors are made whole again, it’s also true that the cost of staying invested during these episodes is quite high.
A recession-linked bear market can wipe out the gains that investors have achieved over the past 5 or more years. And it can take as long as 10 years to get back to even. History bears this out. Furthermore, when you take inflation into account, the time frames are extended. I think it makes sense to have a strategy in place that will mitigate the damage from the next recession and bear market.
Your Plan B.
Every investor has his or her own version of a Plan B. The structure of the plan must be appropriate for the objectives and risk preferences of the individual investor. Therefore, I don’t have a standard, or “cookie-cutter” Plan B to offer my clients and subscribers. Here is a simplified example of a Plan B that an average investor might use. (There is no such thing as an average investor, by the way.)
[one_third_first]Recession indicator[/one_third_first][one_third]Equity position[/one_third][one_third_last]Cash position[/one_third_last]
[one_third_first]25% or less[/one_third_first][one_third]80%[/one_third][one_third_last]20%[/one_third_last]
[one_third_first]50%[/one_third_first][one_third]60%[/one_third][one_third_last]40%[/one_third_last]
[one_third_first]75%[/one_third_first][one_third]40%[/one_third][one_third_last]60%[/one_third_last]
[one_third_first]90%[/one_third_first][one_third]20%[/one_third][one_third_last]80%[/one_third_last]
That’s the general idea. The numbers will change, based on your own risk preferences. And you may decide to hide out in Treasury bonds instead of cash. Or if you’re very aggressive, you may elect to short the market with an ETF like SH or SDS. The possibilities are endless.
Some options for you to consider
It’s only natural for me to promote my own version of a recession forecasting model and a bear market forecasting model, which I will do in a minute. But I don’t have a monopoly on this concept. I have formidable competition, and I’m going to give you some alternatives to my own offerings. Why? Because I hold myself out as an advocate for the interests of investors. How can I do that without giving you choices?
Recession forecasting websites
Recessionalert.com premium subscription
Nospinforecast.com Overview & Outlook Report
ZenInvestor.org Monthly Intelligence Report
Bear market forecasting websites
Hussmanfunds.com
GMO.com
ZenInvestor.org Monthly Intelligence Report
Shameless plug
I can’t tell you how much the other guys charge for access to their forecasting models, but I can tell you that I charge $19.95/month for mine.
To your success.
Erik Conley