There is no ‘one-size fits all’ answer to this question. Every recession or bear market is driven by a unique set of events, and the portfolio strategies that work best depend on the specific causes and the prevailing political and economic circumstances leading to the downturn.
- The dot-com bust was driven by excessive technology stock valuations, and portfolio protection came from over-weighting value, mid and small cap stocks. These stocks outperformed tech for almost 10 years. Given their lower valuations at the time, it makes sense that value stocks (which were largely outside the tech sector) had a period of outperformance. Treasury bonds and gold served as safe havens and appreciated as investors sought safety.
- The financial crisis of 2008–2009 was precipitated by weak lending standards and the packaging of mortgages into risky securities. Banks were at the center of the crisis. In this case, the value sector - which includes a large percentage of banks and financial companies - underperformed the general market. Once again, Treasury bonds and gold provided safe havens and appreciated. Federal Reserve actions to lower interest rates and purchase Treasury and Mortgage-Backed Securities further benefited the bond market.
- The 2020 recession was caused by the Covid-19 pandemic – an unexpected non-financial catalyst. In this case, both stock and bond markets briefly went into free fall. Cash was a stabilizing asset, and gold briefly rallied at the onset of the crisis. Once again, the Federal Reserve dramatically lowered rates, and the U.S. government also provided fiscal stimulus by putting money directly into citizens’ pockets. In this scenario, Treasuries rallied on lower interest rates and growth stocks soared.
- In 2022, high inflation and Federal Reserve actions to slow the economy by raising interest rates caused a bear market in stocks. When inflation expectations climb, bond yields rise as investors demand higher returns to compensate for this risk. Rising yields push bond prices lower. So, in this case, Treasuries did not provide a hedge against falling stock prices, much to the chagrin of 60/40 portfolio proponents. 10-year interest rates started the year at extremely low levels (around 1%) and rose to almost 4% by December. One of the best strategies was to own cash instead of bonds (given how low rates were) and to own value stocks instead of growth stocks.
- Consider reducing your equity exposure. If you need your money soon, your risk tolerance has changed, or your goals have shifted, it may be wise to reduce your equity exposure. This is especially prudent when U.S. equity valuations are historically expensive, as they are today.
- Shift a portion of your equities into dividend-paying stocks. Dividend-focused stocks emphasize companies with a history of returning cash to shareholders. This steady income stream can help cushion your portfolio during periods of volatility, providing tangible returns even when stock prices fluctuate. Unlike the financial crisis, we don’t expect banks to be at the center of the problem; their balance sheets are in better shape, and they have been more conservative in their lending standards.
- Buy bonds. To fight a recession, the Federal Reserve will lower rates and possibly buy bonds, in which case bond prices would rise. However, this time, bonds may not help as much as they have in the past, due to the high level of U.S. debt and uncertainty about the willingness of foreigners to buy our debt (especially after the sting of tariffs).
- Hold cash. In a recession, with falling inflation, cash can stabilize your portfolio. The downside to cash versus bonds in a recession is that your money market yields will fall as the Federal Reserve cuts interest rates.
- Consider changing the nature of your equity exposure. Similarly to the recession strategy, shift a portion of your equities into dividend-paying stocks. While dividend-paying stocks may decline, they should fall less than the broader market.
- Buy commodity stocks. In slow growth, inflationary environments - especially with supply shocks such as those caused by tariffs -real assets tend to outperform. The specific type of commodity stock will vary with the political environment. In the late 1970s, it was an oil supply shock caused by an embargo, a problem we don‘t see currently. Today, we are more concerned about agricultural commodities and rare earth minerals.
- Buy gold and gold stocks. Gold is not tied to the credit risk of any institution, is highly liquid, and offers diversification benefits since it often moves independently of stocks and bonds. Gold is a safe haven in an environment marked by geopolitical tensions, trade disputes, and a weakening dollar. Gold and gold stocks have already rallied substantially this year and may consolidate in the near term before resuming their upward trajectory.
The material included herein is not to be reproduced or distributed to others without the Firm’s express written consent. This material is being provided for informational purposes, and is not intended to be a formal research report, a general guide to investing, or as a source of any specific investment recommendations and makes no implied or express recommendations concerning the manner in which your specific accounts should be handled based on your individual circumstances. Any opinions expressed in this material are only current opinions and while the information contained is believed to be reliable there is no representation that it is accurate or complete and it should not be relied upon as such. Investing involves risk, including loss of principal, and no assurance can be given that a specific investment objective will be achieved.
The Firm accepts no liability for loss arising from the use of this material. However, Federal and state securities laws impose liabilities under certain circumstances on persons who act in good faith and nothing herein shall constitute a waiver or other limitation of any rights that an investor may have under Federal or state securities laws.
2x Wealth Group is a team at Ingalls & Snyder, LLC., One Rockefeller Plaza, New York, NY 10020.
Markets around the world are down today due to Trump’s unexpectedly punitive tariffs. These tariffs are feared to be inflationary and may cause a recession in the U.S. and abroad.
As Lenin famously said,” there are decades where nothing happens and weeks where decades happen.” We find ourselves in the thick of chaos, with daily political announcements and stock market gyrations. We anticipated volatility, but we got more than we bargained for.We work hard at fighting confirmation bias. In this blog, we attempt to understand different points of view and explain the steps we have taken in the current environment.
Deep Thoughts and DeepSeek
In 2024, much of the 25% equity market return came from multiple expansion. Earnings for S&P 500 companies only grew about 10%, but the amount investors were willing to pay for those earnings (P/E multiple) expanded by about 16%. Thus, about two thirds of 2024 equity performance came from multiple expansion.
In memory of famous investor Byron Wien, who was known for his list of 10 surprises each year, we provide our own list of potential economic, financial, and political surprises for 2025.
Is the Recent Runup in Chinese Stocks a Durable Rally or a Flash in the Pan?
In August of 2021, we decided China was un-investable and reduced our exposure to Chinese equities. In our blog “From Beijing to Wall Street” (here), we detailed our rationale.
Halloween Came Early
Ouch. Since August 1, the S&P 500 has fallen over 7%, a dramatic move, but not yet a correction from the July highs. However, the NASDAQ is down over 10% and firmly in correction territory.
What’s Happening Under the Covers
Why the U.S. Economy Has Remained Resilient in Spite of the Fed Raising Interest Rates and Reducing Their Balance Sheet
In memory of famous investor Byron Wien, who was known for his list of 10 surprises each year, we provide our own list of potential economic, financial, and political surprises for 2024.
If you just landed from Mars and we told you that three good sized U.S. banks had failed, the Federal Reserve had raised rates 5% in 13 months, the yield curve had been inverted since last year, the latest Senior Loan Officer’s Survey showed banks less willing to lend while already at recessionary lending levels, and according to Treasury Secretary Janet Yellen, we are within two weeks of the government running out of money to pay its obligations, would you believe the S&P 500 is up about 9% thus far this year?
How Banks Work
What Causes Banks to Fail
How the Government is Responding
How Bank and Brokerage Accounts May Be Protected
Dilemma for the Federal Reserve
We suspect most people think getting inebriated is more fun than sobering up.
We hate to sound like a broken record and ruin the party, but inflation presents a problem which won’t be easily fixed.
The four most dangerous words in investing are “this time is different”.
A Tongue in Cheek Guide to the Latest Investment Concepts
Mine your reward coins as you read our blog!
Who doesn’t love the story of David’s triumph over Goliath? This past week a group of “small” investors made tremendous amounts of money (on paper at least) by buying stocks that were heavily shorted by large, sophisticated hedge funds.
Markets hate uncertainty, and we can’t remember an election with such potential disparate outcomes. As we speak, the presidential race looks closer than ever, and the Senate majority is in question. Meanwhile the pandemic rages, and the President and Congress can’t agree on a stimulus plan. It’s no surprise stock market volatility has risen.
Fires are burning. The presidential election has never been more heated, and our whole election process is repeatedly questioned. The cold war with China continues to brew regardless of the political party in power. A global pandemic has taken hundreds of thousands of lives and jobs, created loneliness for our seniors, and caused those entering hospitals for medical procedures to endure alone.
He woke up today and asked us for an update. We explained there was a global pandemic that had claimed almost 400,000 lives worldwide and more than 100,000 in the United States.
How can we treat our ailing financial markets?
Medical experts say widespread lockdowns and social distancing must happen to contain the coronavirus and avoid overwhelming our hospital system.
the Coronavirus
Bombs and tweets couldn’t sink the S&P 500, but Covid-19 did.
While there is a role for gold in a diversified portfolio, gold is not universally liked or owned by investors and wealth managers.
The rates on overnight repurchase agreements, known as repos, suddenly rose above 9% last week.
We never really know where markets and the economy are headed, but market participants constantly look for clues.
Why does the current market tone feel different from the February and March stock market selloffs?
When do they protect you? When do they hurt you?
Worst Day Ever for the Dow Jones Industrial Average!
Perspective As the current bull market ages (from the bear market end in March 2009) investors are increasingly worried about buying at the peak.
The basic difference between a mutual fund and an exchange traded fund (ETF) is that an ETF trades like a common stock as its price changes throughout the trading day.
Brexit is spurring a flight to quality move into US Treasuries.
The short answer is yes.
