The U.S. housing market is at the beginning stages of the most significant contraction in activity since 2006. It hasn’t shown up in many data series yet, but mortgage applications are pointing to a large decline over summer with home-purchase mortgage applications down 40% from their most recent peak in 2021.

Housing data following high CPI reading last week and Fed’s 75 basis point increase earlier this week sent the US stock market headlong into bear territory, the S&P sinking 20% below a January peak and hitting its lowest mark since the previous January.

The possibility of a “soft landing,” which would see the Fed get inflation under control without triggering an economic downturn is increasingly being questioned. 

Is it going to get uglier? 

Future Wealth’s View

Collapse of the housing market is almost certainly a sign of an impending recession. However, fall in home prices takes time as will the recessionary signals. But, with each passing week and a new data point, the Fed’s hopes for a soft landing seem less likely.

Investing during a recession takes a lot of work and a lot of patience. Safety and capital preservation become the two overarching strategies. Within those two frameworks, it behooves investors to begin looking at tax loss harvesting and dividend efficiency as primary ways to benefit from stock market investments as recession takes hold. Tax loss harvesting, in particular, is very appealing as investors can rotate out of stocks that underperform during recessionary times i.e. growth and technology stocks. Dividend efficiency provides investors with cash flow while protecting capital. 

The stock market can indeed get uglier but that does not mean that investors should do nothing and keep holding the same stocks from last year hoping they will come back to previous levels when the market rebounds. It is true that the market will bounce back but the stocks and sectors that will do well going into and coming out of a recession may not be in your portfolio.