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Economically speaking, these are unprecedented times.

The global pandemic massively affected economic conditions, and the subsequent stimulus packages have had an unpredictably outsized impact on inflation. If you’ve been hearing the word ‘recession’ a lot lately, you’re not alone. In fact, most major finance news outlets are all bracing us for one.

However, a new report by Deutsche Bank is predicting that this one could be much worse than expected.

So what does that mean for the country, and for your finances and investments? Below, we break down what the experts are saying, how your investments will be affected and how to protect your assets during an economic decline.

The Short Version

  • Inflation is growing at the fastest rate in 40 years, causing the Federal Reserve to announce the biggest interest rate hike (0.50%) since 2000. The markets are already responding, having dropped 7.85% over the past five days.
  • A new report by Deutsche Bank predicts that the US will experience a recession that is far worse than anyone has predicted. Meanwhile, Fannie Mae said that it expects a “modest” recession in 2023 and a recent Bloomberg study found that over 50% of investors expect a recession next year.
  • For some investors this is an opportunity to buy while “stocks are on sale.” For others, now is a good time to re-examine investment risk tolerances and shore up cash reserves.

Multiple Sources Are Predicting a Recession in 2023

If you’re been anxiously checking the plummeting line graphs of your investment holdings waiting for an uptick, a report released by two Deutsche Bank economists might confirm your worst fears. The German multinational investment bank and financial services company recently released a report titled “What’s in the Tails? Why the Coming Recession Will Be Worse Than Expected”.

In it, they predict that the US may not be prepared for the economic hits yet to come. According to the report, the bank expects a “major recession” to hit around late 2023 to early 2024. The report also urges the Federal Reserve to take decisive action, saying it should “err on the side of doing too much”.

Even before Deutsche Bank’s report, Fannie Mae had forecasted a “modest recession” in 2023. And a “Markets Live” poll conducted by Bloomberg in April found that nearly half of all investors who participated said that they were expecting the U.S. to enter a recession in 2023.

While recessions are hardly joy-sparking — many of us are likely still experiencing very real trauma flashbacks to ‘08 — they’re also more common than you’d think. The U.S. has experienced 13 recessions since the Great Depression, and the average American Baby Boomer has lived through 12 of them in their lifetime.

A recession is marked by climbing unemployment, shrinking gross domestic product (GDP) and a falling stock market that exceeds two months. Sound familiar?

What’s Would Cause a 2023 Recession?

Generally, a hallmark of a recession is decreased consumer spending. This can cause companies to miss their earnings targets, which can cause the stock markets to fall.

Sometimes, like the recession that followed the Dot Com bubble in the early 2000’s, the falling stock market is caused by investors acting speculatively — and a depressed stock market is a huge marker of a recession.

This time, Deutsche Bank economists David Folkerts-Landau and Peter Hooper cite an aging population, continued logistical issues with supply chains, and the Federal Reserve’s hesitation to change their monetary policies. Currently, inflation is growing at its fastest rate in 40 years, prompting the Federal Reserve to announce its biggest interest rate hike since 2000.

However, according to Folkerts-Landau and Hooper, it may be too little too late. It is their belief that any hope that these interventions will result in a “soft landing” for the economy are misguided.

While Deutsche Bank has the most bearish outlook on the American economy — Goldman Sachs, in contrast, predicts a 35% chance of recession — inflation continues to rage on. In fact, the inflation rate hit a four-decade high of 8.5% last month, marking six months of exceeding the Federal Reserve’s 6% target.

So What Does This Mean for Us?

Naturally, we can expect the Federal Reserve’s rate hike to have ripple effects on the economy, including the stock market. When the Federal Reserve announces a hike like this, it’s normal for businesses and consumers to borrow less and spend less because both activities are now more expensive.

This belt-tightening will cause earnings to fall and stock prices to drop. Sometimes, like now, markets will fall instantaneously in response to a rate hike in anticipation of the effect above.

This was apparent with the most recent Federal Reserve rate increase when the Dow dropped almost 1,100 points (3.1%) after the hike was announced. It was the second-worst day for the S&P 500 since the pandemic low of June 2020. The market has since fallen even further — it’s down 7.85% over the past five days.

How to Invest Through a Recession

During the Great Recession, the Dow dropped to its lowest point in 12 years — but it also began tracking upwards in the first quarter of 2009 and made a full recovery by 2013.

The word “recession” triggers all kinds of emotions, especially with the memory of the 2008 stock market crash so fresh in our minds.

During the Great Recession, the Dow dropped to its lowest point in 12 years — but it also began tracking upwards in the first quarter of 2009 and made a full recovery by 2013.

While market-watchers don’t yet predict a dramatic stock market drop like we saw in 2008, it’s important to remember that depending on your risk tolerance and time horizon, a recession doesn’t have to completely tank your finances. In fact, you can take steps now to mitigate the recession’s hit to your portfolio. Here’s how to prepare and invest through a recession, according to your situation.

Related>> How to Determine Your Risk Tolerance

Long Investment Horizons and Steady Incomes

If you have any money invested in stocks, prepare for your portfolio to shrink during a recession. While seeing your account balances drop is not a fun experience, keep in mind that your investments reflect a risk tolerance that you chose, knowing that your portfolio would shrink during a market downturn. Avoid the temptation to tinker with your investments, and instead keep this important mantra in mind: Stocks are on sale.

That’s right. A recession may be scary to some, but for the prudent investor with a long enough investment horizon, it represents a huge opportunity to invest in the market while prices are low and reap the rewards when the market inevitably rebounds. It just might take some time. That’s why, if you have an investment time horizon of more than five years, you can probably afford to wait for that rebound.

In fact, if you have excess funds, a recession may be a good opportunity to increase your exposure and invest even more. For first-time investors wondering whether now is a good time to start investing, the answer is yes. We just recommend that you stick with a guided robo advisor or all-in-one exchange traded fund (ETF), to help you avoid the temptation to tinker with your investments during an unpredictable market.

Shorter Investment Horizons

Anyone considering the nuclear option of panic-selling should be fully aware of the considerable market gains they’ll be losing out on down the road.

For those with a shorter investment horizon, you’ll need to be more careful about your investments. You might not have time for the value to recover before you need the money.

Ideally, you would already have a fairly conservative asset mix if you’re planning on withdrawing in the near future — but if that’s not the case, you still have some options.

Now is a great time to revisit your asset allocation and determine whether it suits your current risk tolerance. If you need to cash out your investments in the next five years, your risk tolerance should be very low.

If you manage your portfolio by picking stocks yourself, now may be a good time to increase your exposure to dividend stocks or companies within industries that have historically been recession-resistant, like education, healthcare, public utility, financial services or consumer staples.

Read more>>Asset Allocation: Filling Your Portfolio with the Right Mix

Unsteady Incomes

The advice above is predicated on the idea that your income is steady, and your employment is unlikely to be impacted by the recession. However, there are many industries that are particularly sensitive to market conditions, like construction, travel, or leisure industries.

If you find yourself in a position of potentially being out of a job in the near future, you may want to consider assuming a defensive position. Increase your cash reserves as much as you can if unemployment seems possible by saving aggressively and keeping your money in a low-risk position.

We personally like high-yield savings accounts for emergency funds. Keeping three to six months of cash in an interest-generating savings account should give you the cushion you need to continue investing even during an uncertain market.

The Bottom Line

Recessions hit every individual differently. While there may be a strong temptation to panic-sell your investments, it’s not advised to do so unless it’s the only available option. Anyone considering the nuclear option should be fully aware of the considerable market gains they’ll be losing out on down the road.

Instead, if your income is not secure, you’ll want to focus your energy on building cash reserves and hoping for the best but preparing for the worst.

If you need to liquidate your portfolio within a shorter time-horizon, consider moving into more conservative investments or (for a very short time horizon) cashing out before the real downturn hits. Lastly, a down market can be a unique opportunity to take advantage of the “stocks are on sale” mentality. If you’re in a stable industry with cash to spare, you might be in a good position to increase the size of your portfolio.

No matter where you are in your investment journey, it’s time to make some money moves, either into your portfolio or within it. Whether it’s as dramatic as Deutsche Bank is calling it or not, recession is nigh: You’re going to want to buckle up.

Don’t wait for the other shoe to drop. Read our other guides to “disaster-proofing” your finances:




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