Jeff Bezos Says It’s Time To “Batten Down The Hatches” In Latest Recession Warning

Key takeaways

• Jeff Bezos is the latest high profile CEO to state that it looks like the US is heading for a recession.
• He sent out a Tweet on Thursday which said now was likely the time to “batten down the hatches.”
• The Fed’s policy of raising interest rates in order to tame inflation is also pushing the economy closer to the edge.
• For investors, there are some key steps that can be taken to limit the damage of a recession, and potentially even profit from it.

It’s been months now since we first started to hear rumblings of a recession. Silicon Valley came off its bull market at the start of 2022 and economic data began to turn after what had been a frankly astonishing couple of years.

Despite a global pandemic, widespread lockdowns and huge supply chain problems, the stock market boomed.

The tide has definitely appeared to have turned this year. Many companies have announced hiring freezes and layoffs, including companies like Meta, Tesla, Coinbase, Spotify and Peloton.

Through the summer a number of high profile CEOs in charge of these companies came out with a negative outlook. Coinbase CEO Brian Armstrong said that he felt a recession was likely and that it could last “for an extended period” in his announcement that the company would be laying off 18% of its workforce.

Tesla CEO Elon Musk also announced layoffs in June of up to 10% of its employees, while saying that he had a “super bad feeling about the economy.”

JPMorgan Chase CEO Jamie Dimon has also said he believes the US could be headed into a recession in the next six months and that the situation is “very, very serious.”

Now, Amazon founder Jeff Bezos is getting nervous too.

On Tuesday evening Bezos retweeted a CNBC interview with Goldman Sachs CEO David Solomon, in which he said that there was a good chance of a recession in 2022. Bezos commented, “Yep, the probabilities in this economy tell you to batten down the hatches.”

Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $100 to your account.

Why are we not in a recession yet?

It might come as a surprise that we’re not officially in a recession yet. The traditional definition of a recession was two consecutive quarters of negative GDP growth. We’ve already hit that in the United States, with the economy contracting -1.6% in Q1 of 2022 and going backwards again -0.6% in Q2.

Nowadays the definition of recession has become more nuanced, with the National Bureau of Economic Research (NBER) responsible for calling the start of an official recession. In order to come to a conclusion, the NBER looks at a wider data set than just economic growth.

While economic growth figures have been down, there have been a number of bright spots in the economic landscape. The labor market in particular has been very stable. Unemployment has been surprisingly low and nominal increases in wages have been higher than average too.

Now, once inflation is taken into account, real wages have still gone down, but nevertheless it has been a tight labor market in many industries.

This in turn has meant that consumer spending and consumer confidence has held up well. So while it definitely hasn’t been boom times, there’s been a real mix of good news and bad news for the NBER to sift through.

That’s not to say that things can’t get worse. In fact, they almost certainly will.

The reason we can be pretty confident about that is because we have a major force actively pushing the country towards a recession. Who’s that, you ask? China? Russia? Kanye West?

No, it’s the Federal Reserve.

Fed policy makes recession highly likely

With the economy on unsteady ground, the Fed is implementing rate hikes which is going to put greater pressure on consumer spending and the overall economy. The reason behind all this, of course, is inflation.

Fed chairman Jerome Powell has stated very clearly that they understand that their policy of interest rate hikes is going to damage the economy in the short term. As rates go higher, household expenditure on this like mortgages, car repayments and other debt goes up.

This reduces the amount of spare change in their pockets, which means less money to spend on Netflix, vacations and new pairs of jeans.The hope is that this reduced spending will eventually bring down the rate of inflation.

While a faltering economy isn’t good news, the Fed believes that sky high inflation is much more damaging. In a situation that seems to have no good outcome, the Fed has decided that a likely recession is the least worst option.

It’s worth pointing that the Feds projections show the economy narrowly avoiding a recession, though they admit that one is possible. The likelihood has increased in recent weeks with the September inflation figures showing that the rate hikes have so far had a limited impact on the rate of rising prices.

The expectation is for the Fed to hike rates by at least 0.75 percentage points at their November meeting, with an outside chance of a super rate hike of a full percentage point.

What a recession mean for investors

There are different types of companies and areas of the economy that perform better during recessions. That doesn’t mean it’s easy to pick big winners when the economy is down, but there are trends that investors can look to in order to plan their investments going forward.

One of the biggest and most obvious of these is the way large companies perform compared to small ones.

Large caps tend to have much more stable and diversified revenue than small and mid sized companies. They’ve generally been around much longer, meaning customers will have a longer track record with them and will have their products and services more ingrained into their lives or businesses.

They’re also likely to have a wider range of income streams to generate revenue from, some of which will be less sensitive to the overall health of the economy than others.

Consider Apple as an example. As a new company back in 1976, they offered a single personal computer. That meant a single product providing all of the revenue for the company. Over time, they added different models of personal computers to their product line.

This created some diversification, but the company was heavily dependent on the strength of the market for personal computers.

Fast forward to 2022 and Apple now generates revenue from desktop computers, laptop computers, mobile phones, tablets, streaming movies and TV, a music platform, cloud storage, watches, smart home devices, headphones and more.

As a large, mature company, Apple has built up a massive reputation and a wide range of products and services that makes it much more resilient to market downturns. That’s not to say it can’t be impacted, but it’s likely to continue normal business throughout any recession that comes our way.

At Q.ai we’ve packaged this trend into our Large Cap Kit. This implements a sophisticated pair trade takes a long position in large companies and a short position in small and medium sized ones.

The way this works is that it allows investors to profit from the relative movement between big companies and smaller ones. Taking an outright long position in large companies like Apple can mean that investors still lose money during a recession. After all, we’ve seen recently how even stock in companies like this can go down.

By using a pair trade, investors can profit even if the overall market is sideways or down, as long as large companies hold up better than smaller and mid-sized ones.

It’s the kind of thing that’s usually reserved for big-baller hedge fund clients, but we’ve made it available for everyone.

Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $100 to your account.