The stock market has been in for a wild ride in the last couple of months.
In 2018, the S&P 500, a major U.S. stock market index, lost 6 percent, which makes last year the worst year for stock investors since 2008.
Stocks violently sold off in October and in December of 2018 on fears over slowing economic growth and a more muted global growth forecast for 2019. Add to that increasing uncertainty related to the trade talks between the United States and China and another looming government shutdown, and you understand why some investors fear another round of volatility, or, potentially, a U.S. recession.
Is A U.S. Recession In The Cards?
That’s difficult to say with certainty, but it probably is, Yes.
Stocks have risen since the first quarter of 2009 when investor sentiment with respect to the U.S. economy was at its lowest point in decades. Stocks have been on an epic bull run for almost 10 years, and it is the longest recovery in U.S. history!
A recession, therefore, is overdue. Interest rates are rising again. Inflation is picking up. The U.S. is at full employment. It is very hard to move higher from here, and chances are that the U.S. will see a recession in the next 12 months.
How To Recession-Proof Your Investment Portfolio
I see limited upside for stocks in 2019 as economic growth will likely continue to slow throughout the year. Hence, investors need to prepare themselves and their investment portfolios for more downside and more volatility this year.
Here are four things to do in order to deal with the coming U.S. recession like a boss:
1. Don’t panic!
Recessions come and go, and we will surely survive the coming one. If you have a long-term financial plan, stick to it. Don’t be emotional and don’t panic!
2. Make Strategic Changes To Your Asset Allocation
You may want to think about reducing your exposure to cyclical stocks (aviation, banks/financials, travel, autos, manufacturing) and increase exposure to non-cyclical stocks (consumer products, telecoms, pharma, and utilities). Cyclical stocks are stocks that do well during a boom when consumers spend a lot of money on, say, cars and travel while non-cyclical stocks do well during an economic downturn (people still need to pay their electric and phone bills, for example).
3. Shift Funds Into Quality Income Vehicles
Some investors like to be fully invested in the stock market and – for some reason or the other – don’t like to sit on cash.
In this case, I recommend that you rotate funds into high-quality income vehicles such as real estate investment trusts, or REITs, that pass the cash from their property portfolios through to shareholders. Real estate investment trusts are one of my preferred income vehicles in the stock market market as they provide steady dividend income on a monthly or quarterly basis and tend to be very liquid.
Examples of higher-quality stocks, in my opinion, include Realty Income Corp., National Retail Properties and healthcare REITs Welltower and Ventas. These companies have a history of earnings and dividend growth, independent of how the stock market or the U.S. economy is doing, and they have shareholder-friendly management teams in place that actually care about their investors.
4. Raise Cash
After a 10-year recovery, it can’t hurt to sell some stocks and realize some profits.
If you bought stocks at some point in the last five to ten years, you will probably sit on some unrealized capital gains, and now may be just the time to lock in your profits! Assuming that a recession indeed hits the U.S. in 2019 (or 2020), stock prices are set to fall.
Taking profits and raising cash is the smart thing to do. Raise some cash today that you can use to buy stocks when they are cheap and out-of-favor during a recession.
A U.S. recession is coming, whether you like it or not. Smart investors think ahead and recession-proof their portfolios before the crap hits the fan and stocks fall out of favor. Now is still a good time to sell and take profits. Investors will have a lot more opportunities to reinvest their cash during the next U.S. recession, at more attractive valuations, and better dividend yields.