The Recession Is Here… Here’s How to Trade It

I have no idea why the folks in charge are saying that a recession is avoidable or unlikely. By their own metrics… it’s already here.

The Fed’s GDPNow is an indicator of real-time economic activity. It’s one of the few gauges that lets us look at data as it’s coming in.

It’s not perfectly accurate, to be sure. Last quarter, it said the nation’s economy was growing at a 1% clip. But the economy actually contracted by more than 1%.

It was one of its biggest misses to date.

But as we near the end of the second quarter, the indicator is showing a nasty trend.

It’s falling fast.

When I last wrote about the GDPNow figure, in early June, it showed the economy growing at a clip of 0.8% annually. But now… the meter has flatlined. The latest reading is 0.0%.

The trend is quickly going downhill.

What’s it mean?

First, it’s clear the folks in charge are in no hurry to admit that we’re in a recession. Yes, every other recession came with two consecutive quarters of negative GDP growth – which is likely what we have right now. But the gang in Washington is looking for an excuse – any excuse – to deny it.

When the year’s first quarter numbers came in negative, they blamed inventory issues. And now, they’re playing with the definitions of things. A recession can’t come at a time of strong employment, they say. The pain isn’t widespread enough.

It’s hogwash.

The economy is slowing. It’s quite likely it’s going backward.

And because the majority of investors don’t dig beneath the headlines and instead believe everything they’re told, they will be surprised when the news finally hits.

They’ll jump out of the markets in fear.

But as I’ve mentioned before, history shows that the bulk of the market’s pain comes before the official declaration of a recession.

Once a recession is declared, the forward-looking market realizes consumers feel angst and discounts the future earnings of the nation’s businesses.

For investors, buying in the face of volatility is hard.

It’s much more tempting to try to time the market, to sit on the sidelines until a bottom is reached.

It’s a dangerous idea.

Instead, we should put our blinders on and look past the next few quarters.

It’s why I like real estate investing in times like these. Yes, there’s a good chance that home prices will fall over the next 12 months – perhaps significantly. But if a good deal comes up, I’m not going to pass on it because I think it could be 10% cheaper in a year.

I may miss a great opportunity if I wait.

With real estate, we think long term… like 10 years out or more.

So the question is not whether I think a property will be worth more this time next year… but whether I think it will be worth more in a decade.

And who hasn’t looked back on property values and said, “Geez… if I only I’d bought it a decade ago.”

Here’s the good news… the really good news.

In a recessionary environment, it’s not just land that benefits from this mentality. It’s the majority of assets… especially equity.

Yes, there are all sorts of opportunities to play the daily ups and downs with stocks these days. But that’s only one side of things. Far off on the other side, some of the wisest investment moves being made right now are from the folks asking themselves, “Will this asset be worth significantly more in a decade?”

There are lots of stocks for which we can answer that question with an unwavering yes.

Healthcare companies… insurance companies… virtually anything with demographics or reliable math on its side will do well.

It’s also a flat-out fantastic time to be jumping into one of our favorite sectors – startups.

Folks who get into the space looking for a booming return in just a few months are often disappointed. Few startups get acquired or go public in their first year or two of business. But if we start thinking in terms of multiple years or even a decade or more… then the opportunity becomes quite grand.

I know many folks don’t like to hear about opportunities that can take years to unfold.

“My doc says I shouldn’t even buy green bananas,” they say.

I get it.

But here’s the thing… This tactic is temporary and, most importantly, is part of an overall strategy.

Nobody should be putting all of their money into speculative startups – just like nobody should be putting all their money into ultra-short-term strategies.

It takes a mix.

Current market conditions beg us to adjust our mix – perhaps dramatically – and temporarily load up on solid, long-term plays.

They stand to pay off exponentially.

The other side of the strategy, of course, is playing the short-term volatility – using a mix of tactics, such as options, shorting, and covered calls and puts. That way, we can play the market’s daily movements, no matter which way they go.

This isn’t something we’ve done a lot of at Manward. We haven’t had to. With trillions in easy money flowing through the market, we’ve almost entirely gone long in our portfolios.

But once those next GDP numbers hit the Street, many, many opportunities will erupt. If these sorts of ultra-short-term tactics are something that excite you… and you want us to provide insight on them… let me know. We’ll make it happen.

Drop me a note at mailbag@manwardpress.com.

Bottom line… The economy is changing dramatically. If your trading strategy isn’t following in kind, well, you’d better make that happen now.

Think of a barbell.

We have long-term strategies on one side… and ultra-short-term strategies on the other. Everything in the middle can be put on hold.

Do it right and all this bad news will be very good indeed.

Be well,

Andy