I stated in a recent post that all new money is going to go into bonds, because I don’t like where the stock market is currently. I’m going to flesh this out a bit further and take my position further. I’m officially going full defensive mode.
I think a recession is coming, and here’s why. You’ve got the trifecta of the following:
- The yield curve is inverted.
- The Fed is done hiking. It’s gone increasingly dovish in its language in recent weeks. Shocking how quickly it’s done this, frankly.
- The economic data is deteriorating.
All three of these items signal recession. Recessions frankly have gotten a bad wrap because of how ugly it was in 2008/2009. I don’t think the next recession is going to be a disaster. It’s just the end of the business cycle. It’s fairly typical stuff.
But, equities will suffer. And history tells us that the equities suffer most in the six months leading up to the actual recession. When the actual recession is here and present, that’s actually when you want to be buying. And buying I’ll be doing.
Interestingly, the inverted yield curve and the Fed being done hiking rates pretty much always happens before a recession. The recession could be anywhere from six months to 18 months away, but I think it’s definitely coming.
Am I willing to sit out potential rallies and gains to be had in the meantime while I wait as much as 18 months for a recession? Absolutely, I am. I believe patience and willing to sit out short term moves is an essential part of long-term investing.
My strategy moving forward – likely most of 2019 – is as follows:
- Do not add to any equities position
- Increase allocation to Treasuries – typically a “head to safety” play when a recession hits
- Not be in a hurry to deploy additional cash
- Possibly add small positions to gold & energy (often reflation plays with the Fed getting increasingly dovish)
Note that this strategy might look foolish for months at a time. But I’m ok with that. I’m willing to sit out bounces in the name of protecting capital, and positioning myself to take advantage of a major move lower.
What would the move lower in the S&P look like if a recession occurs? I’d guess that it would be a move anywhere from 25% to 40% lower. With the S&P at roughly 2,815 and the Dow currently at 25,625, this would mean a target as follows:
- S&P declines to somewhere between 1,689 and 2,111.
- Dow declines to somewhere between 15,375 and 19,219.
A 40% decline will rattle some cages, indeed. Making specific predictions with specific timing, however, is quite difficult and I don’t pretend to be able to do that better than anybody.
But, I think the indicators are obvious. The business cycle has topped. The Fed’s done hiking, and the yield curve has inverted. Being cautious makes a ton of sense at this moment in time.
Note that the Dow is not even 5% off its all-time highs at the moment of writing this. Are you sure you want to be that long equities given the indicators that are flashing right now for the first time in a decade?
Buy and hold investors are right in that continuing to buy through a recession is a smart play. And most people that attempt to time the market end up losing out. But, with markets high, and the certain indicators flashing as they are, it might make sense to shift your allocation toward a more defensive posture.