Analysts at mutual fund giant Vanguard estimate the probability of the US falling into a full-blown recession sometime during the next 12 months at 25%, and some time during the next 24 months at 65%.
The Vanguard analysts are not alone.
A SmartAsset survey of nearly 300 financial advisors taken in early August found that 80% believe the US is already in a recession or will enter another in the next 12 months. A rough rule of thumb to define an economy in recession is to record two straight quarters of declining economic growth. For the second quarter of 2022, the country’s gross domestic product (GDP) fell 0.9% after a 1.6% contraction for the first quarter.
But many believe that it takes more than one negative growth to trigger a recession.
To help understand what a downturn is and how to strategize your investments for a down market, consider working with a trusted financial advisor.
Is A Recession Coming?
Other factors are part of whether an economy is in recession. They include employment, which remained high despite the GDP figures, with an unemployment rate of 3.7% for August, a level well below the 5% unemployment rate that economists traditionally consider full employment. As well as adding over half a million jobs, inflation stalled between June and July. Since then, gas prices have fallen, housing prices have fallen and consumer spending remains strong.
Even with these signs of improvement, prices are still higher than before the pandemic. Even if inflation were to disappear tomorrow – falling to 0% for the rest of the year – the inflation rate for December would be 6.5%. It is therefore unlikely that the Federal Reserve’s Open Market Committee will keep interest rates up. Currently, another hike of at least 50 (0.50%) or 75 (0.75%) basis points is set for this week, with further increases to 2023.
The Vanguard analysts wrote that they expect the Federal Reserve to raise its target federal funds rate to a range of 3.25%–3.75% by the end of the year, which will raise rates on mortgages, auto loans, credit cards and other consumer and business . fishing. The aim is to reduce the amount of money available in the economy to lower demand for goods and services, resulting in lower prices to reduce inflation.
The higher rates are also designed to increase unemployment, reduce business earnings and discourage business managers and consumers from spending to conserve cash so that money doesn’t run out. This is what Federal Reserve Chairman Jerome Powell meant when he recently said that the upcoming interest rate increase will “bring some pain to families and businesses.”
One indicator Vanguard’s forecast focuses on is the spread between the 10-year Treasury bond and the 3-month Treasury bill. In a strong economy, long-term interest rates are higher than short-term rates, such as the 1.64% spread between Treasuries in June, well above the long-term average of 1.20%. Since the end of June, however, the spread has fallen to 0.29% by the beginning of September, a strong indicator of a possible recession.
How to Prepare Your Portfolio for an Economic Recession
Stocks have already fallen this year and would fall even more in a recession as corporate earnings suffer. Stocks tend to fall before recessions and rally before the downturn ends. Given the impending recession, investors should:
The Bottom Line
Vanguard predicts that there is a 65% chance that the US will experience a recession in the next 24 months. There are steps, however, that investors can take to prepare themselves for a downturn.
Tips for Weathering
A financial advisor can help you protect your portfolio against the recession, while growing your money. Finding the right financial advisor is much easier with SmartAsset’s free tool. In fact, it can match you with up to three financial advisors in your area in five minutes. Get started now.
Your investment strategy should include the possibility of a downturn, which is why your asset allocation should be more conservative as you approach retirement. By reducing your exposure to stocks, you can avoid the possibility of your retirement accounts taking a big hit right when you need them. If you’re still in the market when a recession hits, consider these five things to invest in during a recession.
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