Profiting from a Recession
One of the most important indicators for recessions has just gone off, prompting many to predict that a major economic pullback is in the offing in the near future. The bond market yield-curve has inverted.
In layman’s terms, that means that shorter bonds are now paying higher interest than longer-term bonds. That usually happens when investors believe that the long-term outlook for the economy is bleak.
This has been a pretty steady indicator of recessions for the past 20 years. Whenever the two-year and 10-year bonds invert, a recession follows within six months to two years. (Source: “Main yield curve inverts as 2-year yield tops 10-year rate, triggering recession warning,” CNBC, August 13, 2019.)
Recessions are almost never a good thing: people lose money, companies close, and stocks fall. However—and this is important—recessions can also be great opportunities for investors. In fact, a lot of people get rich off of recessions. You just need to play your cards right.
Keeping in mind that the recession is at least a few months away, according to the past predictions of the bond yield-curve, that means you still have at least several months to see big profits off of stocks.
So one way to approach the stock market would be to invest in more short-term, higher-yield plays, rather than longer investments.
The other move is to try and wait out the recession, of course. Which is to say make your investments as you would normally with the knowledge that short-term gains will be low, but that eventually the stocks will likely return to their winning ways.
A final play is to keep out of the stock market entirely as the recession approaches. And then, when it hits, aggressively invest in companies that are likely to make significant comebacks.
That last strategy is a famous one that requires both insight and timing but, when executed correctly, can lead to massive gains down the road.
For the most part, you probably want to employ an investing strategy that combines all three of these methods to see the best results.
And, of course, it’s worth noting that just because this indicator has been right in the past doesn’t mean it will necessarily be right in the moment. It likely will, but “likely” isn’t a guarantee.
In any case, there will come a time when a recession does hit; that is a guarantee. The system is not recession-proof and we’ve been in one of the longest recovery/boom times in stock market history. So there will be a fall eventually. The key is to not panic, but rather use the recession as an opportunity.
The stock market is looking to be more and more en route to a recession.
But while there are dangers in the market that await, savvy investors will be able to navigate the market in such a way that the recession isn’t an obstacle, but a boon.