This Last Week of June 2022 Thoughts: Recession Watch: Everyone is calling for it.
Updated: Sep 23
RECESSION WATCH: Everyone is calling for a recession: they just differ about WHEN. Google searches for “recession” were higher than during the early days of Covid and folks who don’t think about recession now have it on their mind. So, is it here? NO…not based on the data we have, this week at least.
10-Year Bond Yield Watch: 3.3% last week, 2.9% this week.
RATE WATCH: Schwab Value Advantage Money Market SWVXX 7-Day Yield: 1.163%! Schwab’s Money Market Funds: Money Market Yields are on the Rise
Water investments are not just an environmental play: “It’s an industry that has some of the most positive inflation-protected pricing power of any industry. Read more here: More Water Please
Our Fund Focus: See this research piece on “Three Reasons Why Clean Energy is at a Tipping Point. ICLN Clean Energy Fact Sheet
This may be the most anticipated recession ever: even Uber drivers talk about it!
The first half of 2022 was bad for stocks, bonds, cryptocurrencies, and every asset class outside of commodities. The S&P 500 dropped 20.6%, the worst 1st half since 1970; the Dow Jones’ 15.3% 1st half drop is its worst since 1962. Declines of 29.5% from the Nasdaq and 23.9% from the small stock Russell 2000 are the worst 1st mid-year return on record. The Bloomberg U.S. Agg, the index of your bond portfolio, fell 10.7%...the worst first half since 1975. Lots of “Worst” going on, except for oil, metals and agricultural commodities which are up 40%.
As for the second half of 2022, Barrons’ outlook is far from certain but they see a weaker job market; lower consumer confidence; a savings spend-down; a decline in the housing market; lower expenditures by businesses; high inflation, and aggressive Federal Reserve interest-rate increases. While a recession is in the cards (if not later in 2022, then in 2023) based on the overall health of the banks, business and the consumer, it doesn’t need to be a deep and drawn-out contraction like the recession and financial crisis from 2007-09. And it may seem counterintuitive, but stocks and bonds typically rally long before the recession is officially here.
The Fed and other central banks around the world are fixated on bringing down inflation and it usually takes a recession to achieve this. Despite renewed declines in equity markets and broadening signs that investors are bracing for a major slowdown in the global economy, most central banks appear determined to press ahead with the most aggressive and synchronized tightening cycle since at least the 1990s.
We need to take what we know from the past, think how it could “be different this time” and have your portfolio be basically fully invested before the recovery begins. This is how we get through this particular interest rate cycle. This is what being smart looks like.
The selloff in one of my favorite asset classes, lower-grade bonds (aka junk bonds) has resulted in the yields doubling on average, to 8.4%. In the past 30 years, only during the 2008-09 financial crisis and the March 2020 Covid-19 market downturn have high-yield bond dividends doubled so quickly. Moreover, with a higher yield, investors will “stick with their junk” as this kind of yield can offset up to a 12% default rate. Last year’s we had a 1% actual default rate, so we are far from historical levels.
😊😊Why does this matter to you? You know what they say about another person’s junk…don’t you? When junk-bonds have yields between 8% - 9%, total returns in the next 12 months historically have been strong: 13% has been the average over the past 3 decades.
This has been the toughest year for bonds, EVER…but bonds won’t be down forever. Look at the Return columns since 1977: bonds have been a part of helping reduce risk and provide an income for decades.
😊😊Why does this matter to you? So, this year, Cash HAS been King but do not make a mistake of staying in cash for too long…or in moving to CDs. When stocks and bonds have performed like this year future returns typically pay off. When the recession gets ramping up…bonds will be your best friend.
Required Disclosures: Always read the fine print! This content reflects the opinions of Julie Skye and is subject to change without notice and is informational and entertainment purposes. It is not a recommendation regarding the purchase or sale of any security. There is no guarantee that any statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Securities investing involves risk, including the potential for loss of principal. There is no assurance any investment plan or strategy will be successful.
Julie is an Investment Advisor Representative of Sustainable Advisors Alliance, LLC (SAA, LLC): Advisory services are provided by SAA, LLC.
Registration with the SEC does not imply a certain level of skill or training.