Luckily, one can right now buy things like CDs and agency bonds yielding a full 3% over the past 7 months' inflation rate. A portfolio loaded with these assets is not only well positioned for a recession, it's also well positioned to pivot back into risk assets once the recession is obvious. That's probably the intriguing investment idea of the day!
I just worry about timing this right. Like most here I hate holding cash, and invest every spare dollar I have, so would take some rejigger of my savings or cash flow to put anything into CDs. Either selling stocks, or start to divert after-tax savings. Latter seems less committed, but both feel like market timing.. And then what are the odds I time both the entry and exit points correct? Sure can get a 18 month CD at 5.35%, or 3 years at 5.05% which is appealing. But that might not looks so good if we have a "quick recession", or even skip it altogether, and rocket out with 10-15%+ stock market gains, ala 2010-2013.
This "coming recession" has been predicted so hard I'm starting to think there's no way it can happen! If everyone knows about it a year ahead how would panic selling occur?? I don't get it.
I purchased a six-figure amount of 6mo and 9mo FDIC-insured CDs yielding >5% today, so I'll share my reasoning:
My
general impression after looked at lots of historical precedents is that there's a lot of time that passes between many of the recession predictors* and the actual onset of recession. Most people are thinking in terms of weeks and months when they should be thinking in terms of quarters and years.
For example, the 1978 inversion of the 10y/2y yield curve was not followed by a recession until 17 months later. In the past 45 years, the 10/2 yield curve has preceded the start of a recession by an
average of 14.3 months (range: 6-22). This same yield curve most recently inverted in July 2022, so we're only on month 9.
Every predictor or signal has its own timeframe, most are unreliable if read in isolation, and some only indicate once a recession is in progress. Based on what I'm seeing, a recession could start at any time. However I'm comfortable buying 6-9 month CDs with yields of 5%+ in this environment for 2 reasons:
1) These CDs will likely drop you off at a point in time when it's clearer where we stand in the business cycle. Recessions tend to be associated with immediate jumps in initial claims, un-inversion of yield curves, and a peaking NFCI, so when the recession comes we'll probably know it within a couple of months. Ideally one's CDs drop one off right into the midst of market chaos and panic, and you buy risk assets at that point.
2) Stocks usually continue to fall through the recession, and recessions can easily last over a year, but have notoriously variable timing, so
the goal is to simply buy sometime during the recession rather than to time the exact bottom. You won't pick the bottom, but you'll get a hefty enough discount if you buy during the recession. The buy signal will be contemporaneous data (reaction to known events), not a prediction of future chart zig-zags (market timing). It would not be unreasonable to DCA over the next 6 months after a recession becomes apparent, because stocks could either keep falling or go up amid the recession. So, worst case scenario, I buy a 9 month CD and the recession starts tomorrow. Stocks drop 20% and there I am with my money locked in. I only feel regret in this scenario if stocks rally so much in the subsequent 9 months that they're no longer a bargain. 2020 aside, that's usually not the pattern. Usually stocks take years to recover, so my expectation in this worst-case scenario is to still be dropped off into a stock sale.
*predictors include: yield curve inversion, an NFCI > zero, a series of Fed rate hikes, durable goods orders, TIPS/nominal spread suggesting a falling inflation expectation, falling inventories, falling commodities prices, falling government spending (which is usually 35%+/- of GDP), or Indeed job postings. The
Inflation and Interest Rates thread has more discussion on these.
