Monthly Outlook: September 2024
Maybe you missed it, but stocks gave us a big head fake in early August, with the S&P500 dipping 9% before bouncing back 9% for a wild round trip over six weeks. This volatility has some investors wondering if this was a precursor of more volatility to come or was just one of those random market moves that proves how risky investing can be. Time will tell.
As trend followers, the volatility did cause us to briefly move to protection mode by selling a few holdings. But within a week or two, the uptrends resumed, and we were able to buy back and get back to full-on growth mode. We know it’s a little frustrating to get whipsawed like this but it’s the best way we know to stay disciplined and avoid “the big loss.” Our portfolios are still up nicely over the past twelve months (in the 12% to 16% range) as we balance upside growth with downside protection.
As we effectively put summer season to rest this Labor Day weekend, all markets from US stocks to international stocks, both growth and value, large and small, and bonds, too, are uptrending. Following our strategy to be invested in markets that are uptrending (and out of markets that aren’t), we roll into September fully invested. That said, we have growing concerns about the economy and how a US recession will likely impact markets soon. We don’t need to act today, but we should prepare.
A Recession is Coming
People have been forecasting a recession for the last year or two and, frankly, they’ve been wrong. But we think the time has finally come. Based on our four favorite recession indicators, a recession is now likely to start by year-end or early 2025. Our indicators are 1) rising unemployment rate, 2) un-inverting 2yr-10yr yield spread, 3) falling interest rates, and 4) a Fed Funds rate cut (signal at least) after a period of rate hikes. All four indicators are now checked, as of late August. When taken together, they have preceded every recession over the past 40 years. Before anyone gets too excited about this call, remember that recessions are a normal part of the ebb and flow of economic cycles. I’ve lived through eight of them and we’ll get through this one, too. But a slower economy does have implications that we should consider and prepare for NOW. This is not the time to buy & hold, ignore risks, and do nothing.
No two recessions are the same, but they tend to have similar impacts. If a recession develops, we should expect 1) rising unemployment from the 3.4% low to probably 6.4% or higher, 2) falling interest rates with the 10-year US treasury rate falling from the 5.1% high to about 2.5%, 3) falling inflation rate and falling retail prices of many things and services, 4) softer real estate prices, 5) rising bond prices (as rates fall), and 6) falling stock prices. Of the eight previous recessions in my lifetime, US stocks had drawdowns ranging from -17% to -56%, with a mean of -31%.
How to Prepare for a Recession
Clearly, the recession impacts listed above are concerning. If we knew with absolute certainty what was coming, we’d be making moves today. But we don’t know for sure, so we just have to be mindful of the potential, and to make plans now for what to do when, and if, a recession comes.
If you’re working, do what you can to secure your employment position by being valuable to your employer. If you have debt, anticipate refinancing that debt when rates move lower. If you have savings in money funds or very short-term T-bills, consider moving out to longer maturities to lock in that rate. If you want to sell your house, anyway, get it done.
Now the biggest question for our investors is what about stocks? If we knew for certain that stocks were going to decline by 31%, then we’d sell today, of course. We think it’s most prudent to continue to hold until we see the uptrends start to trend lower. We might give up the first 5% of loss, but miss the remaining 30%, for example. For each index ETF in our managed portfolios, we use a systematic and rules-based trend following signal to measure the trend and to know when to sell or buy. To minimize loss, you can 1) diversify, 2) sell and raise cash, and 3) use inverse ETFs to hedge. We’ll be using all of these strategies to help our clients maximize their returns, while protecting them from big drawdowns. We’re ready.