With a historical recession indicator flashing red this week, financial experts have shared their top tips for protecting your savings — and even investing — when an actual economic downturn is upon us.
On Monday, the five-year Treasury yield rose above the US 30-year Treasury yield for the first time since 2006. While this was not the more closely observed spread between the 2-year and 10-year, it was still an inversion of the yield curve – which may indicate a lack of confidence in the health of the economy.
And it’s not just the bond market that’s nervous about the possibility of a recession. Famed investor Carl Icahn and economist Mohamed El-Erian both opened up about their recession fears to CNBC last week. They raised concerns that the US Federal Reserve’s attempts to curb inflation, possibly raising interest rates even more aggressively than initially planned, could actually result in even more economic damage.
So what can you do at this stage to protect your savings in the event of a recession?
drip feed investments
Sarah Coles, senior personal finance analyst at UK investment platform Hargreaves Lansdown, said there is still value in younger savers making sure some of their money is invested in the stock market, especially as it offers a better chance of generating inflation-linked returns.
“It’s almost impossible to predict exactly when the next recession or market crash will hit, and putting off investing because of something that may or may not happen can spell disaster,” she told CNBC via email.
For those worried about pooling their savings, Coles recommended putting money into the stock market, as it allows you to “profit from the pound cost average by continually expanding your investments through varying market conditions and economic cycles.” raise”. Pound or dollar cost average is the idea of making regular contributions to your investment pot to offset potential stock market volatility.
If you’re planning to invest your money for less than five years, Coles says that savings should be held in cash. She said people should then make sure they are looking for the best interest rate on cash savings accounts to try to minimize any erosion of value inflation.
At the same time, Coles warned against going overboard in trying to predict how interest rates might move in the coming months or years: “Your goal should be to get the best possible interest rate now, over the period that yields the most sense of your circumstances.”
Investing amidst rising interest rates
Referring to what investors should do with their portfolio, Schroders investment strategist Whitney Sweeney said: “Diversification is key, as is patience.”
She said this is important as market volatility persists, the Russia-Ukraine war remains unresolved and central bank rate hikes over the past week have drawn even more investor focus. Fed Chair Jerome Powell said last week that the Federal Reserve could hike interest rates more aggressively to curb inflation.
“If this all seems a little ambiguous and confusing to investors, that’s because it is,” Sweeney told CNBC via email. However, she added that while there have been few instances where the yield curve has inverted and there hasn’t been a recession, it’s important to note that this hasn’t happened every time.
Like Icahn, Sweeney emphasized that the key question is whether the Fed, as it tightens monetary policy to combat inflation, can “deliver that soft landing” without plunging the US economy into recession.
She pointed out that commodities, along with “value” and “cyclical” stocks, are among the assets that tend to perform best when interest rates rise. Value stocks are companies that are considered to be trading at a lower price despite their strong fundamentals and upside potential. Cyclicals, on the other hand, are companies whose share price development fluctuates with the economic cycle.
“The jury is still out”
Other strategists CNBC spoke to also echoed Sweeney’s argument that a recession is far from set in stone, even with yield curve inversions.
For example, Wells Fargo macro strategist Erik Nelson told CNBC in a phone call that there was a reversal in the mid-1990s that was not followed by an economic downturn. Additionally, Nelson emphasized that there can be a long lag of 12 to 24 months when the yield curve inverts before a recession hits.
Nelson also stressed that the yield curve itself is not a cause but an indicator of a recession and that it is more important to watch what is happening with Fed policy.
He explained that a recession could only become a real concern after the Fed’s benchmark interest rate, which currently ranges from 0.25% to 0.5%, is raised to “restrictive levels”.
In fact, buying stocks when a central bank begins to roll back accommodative policies could often lead to “pretty solid returns” at the end of a tightening cycle, Nelson said.
“So I don’t think you want to start selling stocks when the curve reverses, you want to start selling stocks as soon as the Fed starts saying, ‘I think we’re probably done with the tightening,'” he said.
Antoine Bouvet, senior rates strategist at ING, said many economists were forecasting a 20% to 30% chance of recession, but added that there was cause for concern.
The speed and amount by which the Fed could hike rates, along with a fall in consumption due to rising energy prices and a “weakening” in housing market indicators, are among those concerns, Bouvet said.
“Whether this recession is coming is still unclear, but it’s something that’s on everyone’s radar,” he said.
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