Vanguard says there’s a 65% chance of a recession – here’s what to do

Vanguard says there’s a 65% chance of a recession – here’s what to do

Analysts at mutual fund giant Vanguard estimate the probability that the US will enter a full-scale recession sometime in the next 12 months at 25%, and 65% sometime in the next 24 months.

The Vanguard analysts are not alone.

An early August SmartAsset survey of nearly 300 financial advisors found that 80% believe the US is already in a recession or will enter it in the next 12 months. A rough rule of thumb to define an economy in recession is when it registers two consecutive quarters of declining economic growth. For the second quarter of 2022, the country’s gross domestic product (GDP) fell by 0.9%, after contracting by 1.6% in the first quarter.

But many believe it takes more than just negative growth to trigger a recession.

For help understanding what a recession is and how to strategize your investments to navigate a down market, consider working with a trusted financial advisor.

Is a recession coming?

Other factors are also part of whether an economy is in recession. They include employment, which has remained high despite GDP figures, with an unemployment rate of 3.7% in August, a level well below the 5% unemployment rate that economists traditionally view as full employment. In addition to adding more than half a million jobs, inflation stagnated between June and July. Since then, gas prices have fallen, house prices have fallen and consumer spending has remained strong.

Even with those signs of improvement, prices remain higher than before the pandemic. Even if inflation were to disappear tomorrow and fall to 0% for the rest of the year, inflation for December would be 6.5%. That’s unlikely, so the Federal Reserve’s Open Market Committee is expected to continue raising interest rates. An increase of at least 50 (0.50%) or 75 (0.75%) basis points is currently planned for this week, with further increases through 2023.

The Vanguard analysts wrote that they expect the Federal Reserve to raise its interest rate target for the federal funds to a range of 3.25% to 3.75% by the end of the year, boosting rates on mortgages, auto loans, credit cards and credit cards. other consumer and business loans. The goal is to reduce the amount of money available in the economy to reduce the demand for goods and services, resulting in lower prices to lower inflation.

The higher rates are also intended to increase unemployment, reduce business revenue and deter business executives and consumers from spending in favor of cash to avoid running out of cash. This is what Federal Reserve Chairman Jerome Powell meant when he recently said the impending rate hike will “hurt households and businesses.”

One indicator that the Vanguard projection refers to is the spread between the 10-year Treasury bond and the 3-month Treasury bond. In a strong economy, long-term rates are higher than short-term rates, such as the 1.64% spread between Treasuries in June, well above the long-term average of 1.20%. However, since the end of June, the spread has fallen to 0.29% in early September, a strong indicator of a possible recession.

How to prepare your portfolio for a recession

Stocks have already fallen this year and would fall even further in a recession if corporate earnings suffer. Stocks typically fall before a recession and bottom before the downturn is over. In the face of a coming recession, investors should:

It comes down to

Vanguard predicts that there is a 65% chance that the US will enter a recession in the next 24 months. However, there are steps investors can take to prepare for a downturn.

Tips for weathering a recession

  • A financial advisor can help you recession-proof your portfolio while still growing your money. Finding the right financial advisor is made much easier with SmartAsset’s free tool. In fact, it can match you with up to three financial advisors in your area in five minutes. Start now.

  • Your investment strategy must account for the possibility of a downturn, so your asset allocation should be more conservative as you retire. By reducing your exposure to stocks, you can prevent your retirement accounts from having a major correction when you need them. If you’re still in the market when a recession hits, consider these five things to invest in during a recession.

Photo credits: © ozel, © Somsuk

The post Vanguard Says There’s a 65% Chance of a Recession – Here’s What to Do appeared first on SmartAsset Blog.

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