Last year was the most profitable for American corporations since 1950. Profits surged 35%, driven by strong household demand and the passing of price hikes on to consumers. While American workers are getting pay bumps, consumer prices are rising more than average wages. Still, people are quitting in droves and open positions outpace available workers. The U.S. yield curve extended its recent flattening, after another strong employment report signaled that the Federal Reserve is likely to raise rates at least six more times this year. Investors appeared to largely shake off a recession signal from the bond market that was triggered when the two-year and 10-year Treasury yields inverted for the first time since 2019. The inversion has been a reliable predictor of a future recession. Timing, however, is unknown. It could take up to two years.

What if they held a recession and the Fed didn’t show up?

Future Wealth’s View

We all know how to make money when the economy is chugging along smoothly and the stock markets are moving up nicely. We have not had to deal with a major upheaval since the financial crisis when millions of jobs were lost and trillions of dollars were lost in the stock market. How to make money in an economic downturn is a lesson very few of us have had to learn. We could choose to pass on attending that class hoping that the current environment does not suggest a recession in the future or we could step back and learn what it takes to protect our portfolios when things go bad, real bad. 

The most obvious choice in tough times is moving to bonds and that would be a bad decision in an environment of increasing interest rates. The higher interest rates on bonds is often not enough to offset the drop in value, as such yielding a negative return. The major indices are all in negative territory for the year putting stock indexing as a strategy in the failure column. Keeping money in cash at the bank is an even worse alternative given that inflation is running at 7% i.e. the “safe” money in the bank is losing its value every day at a rate worse than the bond or the stock market.

If you think you have an answer to the best strategy and best course of action for stock portfolios and the economy, Fed Chair Powell will take your call.