Don't Bet on a Soft Landing

The market is officially in a tailspin...

The S&P 500 returned 16% in the first half of the year. The tech-heavy Nasdaq Composite and the small-cap Russell 2000 were up 32% and 7%, respectively.

But like all parties, this one had to end eventually... The indexes are all shedding their gains once again.

The S&P 500 and the Nasdaq are both down more than 6% since the start of August. The Russell 2000 has sold off 10%. And mostly, it's for one reason...

The market is finally starting to listen to the Federal Reserve.

The Fed is serious about bringing inflation down to its long-term target of 2%. It chose not to raise interest rates at its latest meeting, but another rate hike seems likely before the end of the year.

The central bank is openly saying that interest rates will be higher for longer. Fed Chair Jerome Powell seems to think they'll be above 5% until at least the end of 2024.

Don't expect rates to come back down to manageable levels until the Fed is sure inflation has vanished. That might not be until 2026.

Given this economic outlook, strategists at the big financial institutions have changed their stance. A "soft landing" – where we avoid a recession – isn't likely. These folks are now predicting a bumpy ride.

An outlook like that makes it a lot harder to find a good investment strategy. But it's not impossible... Today, we'll discuss what types of assets are best suited when a recession is on the horizon.

Historically, stocks take a beating during a 'hard landing'...

Remember, that's just the modern language for a recession. And when it happens, one other thing is pretty much guaranteed to happen... a bear market for stocks.

When the dot-com bubble burst, the S&P 500 dropped 49% from its all-time high. During the Great Recession, it dropped 57%. And during the pandemic, stocks lost more than 30% in just a month.

All the major indexes seem to be catching on today. It could be a sign that the market is starting to roll over.

But not all asset classes lose value during a downturn. One of our favorite places to look outside the stock market is corporate bonds. Since 1950, the bond market's average performance has crushed stocks during recessions.

Bonds are different from stocks because you're contractually guaranteed to get your money back at maturity. They also offer fixed interest payments over the duration of your investment. This predictable income stream acts as a buffer against market uncertainties.

Bondholders are also positioned higher up in the hierarchy of financial claims. This means they get priority over stockholders if the company goes bankrupt.

And again, unlike with stocks, bondholders' money is protected by legal contracts. Once you buy a bond, you know exactly what your return will be as long as the company stays afloat.

In short, bonds are a more reliable and far more defensive asset than stocks. Over the past seven decades, they've returned an average of more than 10% per year during recessions... while stocks fell.

Folks typically think of bonds as low-risk, low-reward...

But that's not always the case.

These panic times create opportunities for double-digit yields in bonds... and sometimes triple-digit gains.

When the stock market panics, many other markets briefly follow suit. That means bond prices can plummet. If you're patient, you can buy perfectly safe bonds at significant discounts.

If market sentiment stabilizes or the issuer's financial health improves, bond prices can rebound sharply. And even if they don't... as a bondholder, you don't care.

As long as the company doesn't default, your money is guaranteed at maturity. You lock in that return when you buy the bond.

The economy is bracing itself for a hard landing. But there's still time to prepare.

Start familiarizing yourself with the bond landscape. When we enter a recession, there will be plenty of cheap, safe opportunities to keep your portfolio happy.

Regards,

Rob Spivey
October 2, 2023

P.S. The stock market is faltering. It doesn't look like we'll see a recovery anytime soon. But that doesn't mean you should let your portfolio dry up...

I believe the coming crisis will create one of the best credit-market opportunities since the Great Recession. Patient investors will have a chance to scoop up safe high-yield bonds for pennies on the dollar. And the best part is, your returns are backed by legal contracts – no matter what the stock market does from here.

My team and I just launched a brand-new bond-focused research service called Credit Cashflow Investor. For a limited time, we're offering an exclusive "Charter Membership" for 50% off the regular yearly price. Plus, you'll receive more than $8,500 in free research and bonuses. Click here before this offer disappears.