We don’t want to scare anyone, but investors need to be aware of this recession prediction: 2018 could be the year of the next downturn.
This might sound crazy. The Dow Jones is within 300 points of hitting 25,000 points, its highest level ever. Last quarter’s GDP growth came in at 3.3%, its highest growth rate in more than two year. And unemployment is at 4.3%, a level economists consider near “full employment.”
But despite these positives, there are some recession warning signs to keep your eye on.
Now, this doesn’t mean a 2018 recession is a certainty. In fact, we think the economy and the stock market have room to continue growing. But smart investors are never complacent, and we want our readers to be fully informed about what’s coming next.
Here’s why a recession in 2018 is possible and what you can do to protect your wealth.
What a Recession Means for Your Money
Recessions are two consecutive quarters of negative GDP growth. That can mean people losing their jobs, the stock market crashing, or the fear that both of those events could be on the verge of happening.
And while the effects of a recession could be financially dire, Americans are very unprepared to weather that kind of downturn.
In 2015, the Federal Reserve noted that more than one-third of adults in the United States didn’t have assets that could cover their income for three months. Their situations could be devastating if jobs or other sources of income are lost.
Consumer debt is coming close to the levels it reached in 2008, when it hit an all-time high.
With Americans having more debt and less savings with the economy doing so well, an economic downturn could be devastating.
And for investors looking toward retirement, a recession could be devastating too.
In the last seven recessions over the past 40-plus years, stocks have always plunged. During the last recession, the Great Recession in 2008, the S&P 500 lost a whopping 52% of its total value before it recovered in March 2009.
That’s why investors can’t afford to be complacent, especially as these signals could forecast a recession.
Why a Recession Could Be Coming in 2018
The Federal Reserve could cause a recession in 2018.
You see, the Federal Reserve is in the process of hiking interest rates and unwinding its $4.5 trillion balance sheet. Since low interest rates and trillions in spending by the Fed have helped boost the economy and stock prices, ending those programs could lead to a pullback.
The Fed slashed interest rates from over 5% in 2007 to an all-time low of 0.25% in 2008. The idea was to make borrowing money cheap, which would allow companies to grow or stay solvent during the recession at little cost.
But while companies took advantage of the low interest rates and cheap borrowing, they funneled that money into buying back shares of their own stock, boosting stock prices. Between 2008 and 2016, public companies borrowed $1.9 trillion while buying back $2.1 trillion of their own stock.
That’s part of the reason the Dow has soared by over 240% since March 2009.
Now, the Fed is tightening its policies, and that’s pulling liquidity out of the market, a move that could lead to companies slowing down their investments, which could lead to a recession or stock market correction.
And that’s causing this “classic recession signal” to show up again.
The yield curve, which traditionally shows longer-term bonds producing higher yields than short-term bonds, is flattening. When the yield curve “inverts” – when long-term bonds produce smaller yields than short-term bonds – recessions follow soon after.
Recessions have followed an inverted yield curve the last seven times. The reason is simple: Investors typically only buy long-term bonds as a hedge against instability, so when the economy and stock market are doing well, these long-term bonds aren’t very attractive. That lower level of demand keeps their prices low and their yields higher. But when investors fear a slowdown is coming, they flock to the security of long-term bonds, driving up their prices and reducing their yields.
The trajectory of the yield curve shows that’s in the process of happening right now, especially as the Fed continues to pull money out of the economy.
Again, that doesn’t mean a 2018 recession is going to happen. But it is evidence that despite the great economic numbers, there are signs of weakness.
That’s why we want to show our readers two strategies they can use to protect their money, and even profit, if there is another recession coming.
2 Strategies to Protect Your Wealth During a Recession
We’re recommending two strategies to protect your money.
First, own stocks in must-have, resilient companies that can weather a recession.
Money Morning Chief Investment Strategist Keith Fitz-Gerald thinks investors should hold on to stocks in the “Unstoppable Trends.” The trick to making huge profits is to find “must-have” companies that fall into these six “Unstoppable Trends”: medicine, technology, demographics, scarcity and allocation, energy, and war, terrorism, and ugliness (also known as “defense”). The Unstoppable Trends are backed by trillions of dollars that Washington cannot derail, the Fed cannot meddle with, and Wall Street cannot hijack.
And we’re showing you one of our favorite stocks from the Unstoppable Trends, one that made positive returns even as the overall market fell by more than 10% during the 2000 tech bubble collapse. While there’s no guarantee this stock will be immune from the next correction or pullback, it’s one the best companies in the most in-demand industries.
Raytheon Co. (NYSE: RTN) is our play for the trend of war, terrorism, and ugliness.
Raytheon is a leader in the defense industry, with billions in contracts with the U.S. government and other countries across the world. That means if the market falls, Raytheon is going to continue to excel over the long term.
Raytheon has billion-dollar contracts with the U.S. government, but it also has a diverse customer base. International customers make up just under half of its business. That means even if a few countries cut defense spending during an economic downturn, RTN still has plenty of other customers to help it weather the storm.
But RTN’s real allure as an Unstoppable Trend pick is the fact that war is a reality of the world. For instance, as tensions rise abroad, the United States is more likely to need more weapons and equipment. When the United States launched a missile strike on a Syrian airbase on April 7, Raytheon’s stock jumped more than 2%, since its missiles were used.
RTN currently trades at $188.93 a share and pays a 1.69% dividend yield. RTN is up 33% this year. But investment banks are still giving RTN price targets well over $200 over the next 12 months. RBC Capital predicts RTN stock could hit $225; that’s a 20% jump.
Second, own gold to protect your wealth.
Gold is the most well-known safe-haven asset due to its stability during times of economic turmoil.
“Gold is a good ‘store of value’ when uncertainty gets out of hand,” according to Money Morning Executive Editor Bill Patalon. “And we’re definitely deep into what I refer to as the ‘Era of Uncertainty.'”
Now, throwing all of your retirement savings into gold isn’t a good idea. Gold prices appreciate, but slowly, and it’s mostly useful as a hedge.
That’s why Fitz-Gerald says tucking away 2% to 5% of your investment capital into gold is the best way of adding stability to your overall portfolio. That way, you won’t miss out on stock market growth.
While investors can buy physical gold – like bars or coins – we recommend an easier investment for retail investors.
Fitz-Gerald recommends the SPDR Gold Trust ETF (NYSE Arca: GLD).
It’s cheaper than buying gold by the ounce, but the ETF is designed to mirror gold’s price movements. That way you get the same benefits of owning gold with the ease of trading a stock.
*This has been a guest post by Money Morning*