Whispers of a recession are becoming louder as cracks begin to appear in the labor market. Jon Wolfenbarger, a 32-year market veteran, has been warning of a downturn for some time now and recently commented that employment indicators showing the labor market is falling apart point to a recession, which could sink stocks by as much as 70%.
Wolfenbarger points to the Sahm Rule recession indicator, which is based on unemployment numbers, and the picture isn’t a pretty one with the unemployment rate rising to 4.3% in July. The upward move triggered the Sahm Rule recession indicator, which has a perfect track record since 1960 in identifying recessions in real time. It says that the U.S. economy is already in a downturn when the three-month moving average of the unemployment rate increases by 0.5% from its 12-month trough. The unemployment rate has risen by 0.9% from recent lows of 3.4% in a 12-month span, almost doubling the rate that triggers the Sahm Rule.
If you’re invested in stocks either directly or through a retirement account, I don’t have to tell you that your portfolio is vulnerable, and a 70% drop will be disastrous for you or anyone else who is retired or about to retire.
Take the Financial Crisis of 2008, for example. In 2008, the stock market lost more than 50% of its value due to the housing bubble and subprime mortgage crisis. The Dow Jones Industrial Average lost more than 50% of its value and didn’t fully recover until March 2013. However, it took an additional six months to regain purchasing power.
The recovery from the 2008 crash was aided in part by quantitative easing and historically low interest rates. This time, we won’t have the same luxury, as the Fed has already emptied those bullets in its chamber for COVID stimulus spending. A 70% drop in the stock market will be disastrous for stocks and retirement accounts, and the recovery can take more than a decade this time. Retirees don’t have to wait around.
Time for an Assessment
As financial markets exhibit increasing signs of distress, many investors are anxiously seeking strategies to safeguard their retirement savings. With a recession looming and stock markets potentially poised for a sharp decline, it’s crucial to explore investment avenues that offer resilience against economic downturns.
How Sophisticated Investors Protect Their Portfolios
When recession looms, the ultra-wealthy double up on assets non-correlated to the stock and public markets. Typically, they allocate more than 50% of their portfolios to private investments and alternatives like commercial real estate (CRE) and investments in private companies (i.e., private equity or PE), but in the face of an impending recession, they’ll allocate even more to these two private investment classes. Why? Because private investments like CRE and PE are not correlated to the broader markets, they not only offer better protection from a downturn but can actually provide healthy returns during uncertain times.
Why You Should Consider Private Alternatives in a Recession
- Low Volatility: Both CRE and PE tend to exhibit lower volatility compared to stocks. This stability is crucial during economic downturns, as it helps preserve capital and reduce the impact of market swings on your portfolio.
- Inflation Hedge: Alternatives like CRE and PE often act as effective hedges against inflation. Real estate investments, for example, can benefit from rising rents and property values, which can offset the eroding effects of inflation.
- Passive Income: CRE and PE investments can provide consistent passive income streams. Rental income from CRE and dividends from PE investments contribute to steady cash flow, which is vital for retirement planning.
- Appreciation Potential: Both asset classes offer significant appreciation potential. CRE properties can increase in value over time, and successful PE investments can yield substantial returns when the invested companies grow and succeed.
- Tax Benefits: Investing in CRE and PE can offer various tax advantages. For instance, real estate investors can benefit from deductions related to property depreciation and interest expenses, while PE investments can provide favorable tax treatment on capital gains.
- Leverage Expertise: Partnering with experienced managers and investors not only takes the guesswork out of unfamiliar asset classes and segments but also puts your capital in capable hands who can enhance returns and reduce risk. Leverage allows sophisticated investors to free up their time and energy to allow others to create multiple streams of income on their behalf.
Pivot for Protection!
As we navigate the potential for a recession and its impact on financial markets, it’s essential to reassess and adapt our investment strategies. By pivoting away from traditional stocks and reallocating to private alternatives, investors can enhance their portfolios’ resilience and growth potential and achieve peace of mind in the midst of uncertainty.
The lessons from ultra-wealthy investors highlight the importance of incorporating alternatives into your investment strategy. By embracing these asset classes, you can not only protect your retirement savings but also grow your portfolios that generate passive income even during times of economic challenges.
Don’t let potential recessions and market volatility derail your retirement. Make informed decisions, explore alternative investments, and pivot and redirect your portfolio to thrive in any economic climate.
