Is A Recession Looming?: Financial Advisors' Daily Digest

by: SA Gil Weinreich

SA Dividends, Income & Retirement Editor Robyn Conti here, subbing in for Gil, who's observing Passover this week. I'll do my best to fill his very talented and knowledgeable shoes and continue to keep you up to date daily on the latest FA analysis and news here on Seeking Alpha.

The subject of recession seems to be top of mind for Seeking Alpha authors today. Loic LeMener, CFA asks "Is A Recession Coming?"His optimistic take: even if a downturn is on the horizon, it's actually good for the health of the economy. He likens the economy to a forest, and recessions to periodic fires in the ecosystem that naturally clear out small, flammable areas of brush, preventing larger wildfires from decimating the entire forest.

Of course, investors don't relish or appreciate recessions at all. From an emotional standpoint, they desire stability and predictability, however, markets need that "clearing out of the underbrush" now and then to maintain their overall health and create additional growth once the fires of an economic downturn have died down. LeMener's advice is to let nature take its course, and for investors to make the best of an inevitable, yet necessary process. He offers several strategic ideas for doing so:

In that spirit, here are a few considerations for your portfolio in advance of the next recession, whenever it arrives:

  • Have higher than average liquid assets in your portfolio. This will not only buffer your losses during the downturn but also give you more "dry powder" to invest when lower prices arrive.

  • If you're living off your portfolio, have a larger than average cash buffer.

  • Favor companies that are self-funding and don't depend on the capital markets for survival.

  • Favor companies whose products are still bought during severe recessions.

  • Favor companies who have pricing power in case all these extreme policies lead to inflation.

The bottom line: recessions are normal, natural, even healthy, much as we in the investment community hate to admit it.

Also on the topic of recession, Georg Vrba dissects historic trends in the unemployment rate and the recession signals they often portend. He also cites Doubleline Capital's Jeffrey Gundlach:

Others have also observed this. For example, Gundlach in recent webcasts has been following a new metric – the U.S. unemployment versus its 12-month moving average; when the former drops below the latter, it is indicative of an oncoming recession. For the past eight months, unemployment has been between 4.9% and 5.1%, and Gundlach said if it moves up a couple of tenths in the next couple of months, “we will be on recession watch.”

In short, we'll have to wait and see what the unemployment rate tea leaves predict in the coming months.

Where do you think the unemployment rate is headed? And do you agree with LeMener's suggestions for fortifying a portfolio in preparation for a potential recession? Share your thoughts in the comments below.

And some other items of interest to advisors today:

Benjamin Levine, CFA offers a layman's view of momentum.

David Fabian proposes ETFs as a potential antidote to earnings season's "Russian roulette," but no guarantees, of course.

We're in the "sweet spot" for emerging market assets, according to Richard Turnhill.

The muni market is healthier than the headlines might indicate, says VanEck.