- A 2023 recession may be on the way, with economists predicting a 70% chance of economic downturn this year
- However, economists haven’t agreed on when it will begin or how long it will last – though most believe it will be relatively mild
- As recession fears ramp up, it’s important to pinpoint which recession-proof investments could benefit your portfolio
When it comes to economic events, knowing when, where and how isn’t that unusual. What is strange is how far ahead economists forecasted this particular downturn – and how many agree it’s all but inevitable.
In fact, a Bloomberg survey finds that economists see a 70% chance of recession in the next year. But even then, they haven’t rallied around a unified vision.
The Wells Fargo Investment Institute expects the U.S. to see a full recession, recovery and rebound by year’s end.
Goldman Sachs and JPMorgan Chase see the economy coming out a little bruised, but otherwise relatively unscathed.
And Barclays Capital says that 2023 will be the worst global economy in four decades.
That’s a lot of dissent surrounding a single (albeit complex) economic event. If you’re wondering how to unpack your recession fears – or even profit from recession-proof investments – here’s what to know.
Recession fears: Are they warranted?
The potential 2023 recession is unusual in another way: it’s likely to be (somewhat) intentional.
In response to climbing inflation through the latter half of 2021 and into 2022, the Federal Reserve began hiking interest rates. Effectively, these serve to increase the cost of borrowing money in different areas of the economy. (Think mortgages, credit cards, personal loans, business loans, etc.)
When borrowing costs rise, businesses and individuals rely on credit less, which means they generally make fewer or smaller purchases. That drives down demand, which means that businesses may lower prices (or at least stop raising them) in response.
But historically, hiking interest rates doesn’t just slow inflation down a little bit.
Interest rates and recession fears
Moody’s Analytics chief economist Mark Zandi notes that, “We’ve seen this story before. When inflation picks up and the Fed responds by pushing up interest rates, the economy ultimately caves under the weight.”
Back in September 2022, Federal Reserve Chair Jerome Powell admitted that the Fed’s fight against inflation could cause a recession. And though he recently acknowledged that he believes “there is a path to a soft, or a soft-ish, landing,” that opportunity has “narrowed.”
To steer the U.S. economy back to its target 2% inflation, the Fed has already hiked interest rates from near-zero to the 4.25-4.50% range. Currently, it predicts that its target rate could top 5% by 2024.
Already, higher rates have seeped into various markets as annual inflation stubbornly sticks around 7.1%.
November’s data shows home sales down over 35% in the last year as 30-year mortgage rates neared 7%.
The average credit card interest rate hit 16.27% for existing accounts and 21.59% for new offers.
And though consumer spending rose overall in the third quarter of 2022, people spent less overall on food, beverages and transportation.
Jobs and wages data confound the issue
Altogether, the data suggests that people are definitely spending less thanks to higher interest rates, sticky inflation or both. But even as budgets bloat and savings rates shrink, recession fears have yet to bear fruit.
One big reason: An incredibly strong jobs market.
During 2022, the economy added 4.5 million jobs, with new unemployment claims hitting historically low levels in December. Additionally, average hourly wages rose to an annual 4.6% in December, compared to November’s revised 4.8%.
But for inflation to decrease, this will likely have to change. During last month’s meeting, Fed officials predicted that unemployment would rise from around 3.5% now to 4.6% in 2023, which would coincide with recession-level numbers. And though current numbers remain strong, the cracks have begun to show.
Back in November, several major tech firms announced a combined 51,000 job cuts as the bloated industry trimmed the fat.
Hiring has also begun to slow. While December notched 223,000 new jobs, that’s just over half the 400,000 monthly average seen earlier in the year.
Recession 2023: How long will it last?
While the potential for recession has been on the horizon for months, the Fed has so far failed to wrangle inflation – let alone cause an entire economic downturn.
And even if a recession does lie around the corner, no one can definitively say when it will hit or how long it will last.
But that hasn’t stopped economists and high-profile financial firms from giving it their best shot.
Bank of America
Bank of America notes that a recession is “all but inevitable” in the U.S., UK and euro area. The firm expects a “mild US recession in the first half of 2023.”
BCA Research swings another way entirely: the firm predicts that “growth will surprise to the upside in 2023,” with the U.S. averting a recession entirely. However, the firm won’t rule out a downturn over the next 24 months, though it predicts that “it will probably not start until 2024.” More importantly, the firm says, “any US recession is likely to be a mild one…[perhaps] almost indistinguishable from a soft landing.”
Tim Simons, a money market economist at Jefferies, thinks that 2023 will see a “classic recession.” He predicts that the downturn will begin at the corporate level in the first half of 2023, leading to reduced headcounts. By mid-2023, he predicts that economic growth will slow and inflation will begin to dissipate.
JPMorgan Asset Management’s position is short and sweet: “Our core scenario sees developed economies falling into a mild recession in 2023.”
Diane Swonk, chief economist at KPMG, hopes for a “short, shallow” recession that we can recover from quickly. She holds that balance sheets remain strong overall and that “Fed-induced recessions are not balance sheet recessions.” In other words, “We’ll have [a recession] because the Fed is trying to create one.”
Swonk sees a recession running through the end of 2024 if interest rates remain high.
Truist Wealth calls for a recession in 2023, though it expects economic growth will remain strong relative to its global counterparts.
UBS takes a particularly weak outlook, predicting global growth of just 2.1% annually with “13 out of 32 economies expected to contract” by end 2023. The firm forecasts “something akin to a ‘global recession.’”
Wells Fargo Investment Institute
The Wells Fargo Investment Institute sees a recession occurring in the first half of 2023 that impacts corporate earnings while creating “important inflection points for investors” in the coming year. The firm also predicts that the economy will hit recovery by midyear and “a rebound that gains strength into year-end.”
Recession-proof investments to buff your portfolio
As the (maybe) not-so-distant economic decline (possibly) grows closer, investors should prepare their portfolios with a series of recession-proof investments.
Bear in mind that there’s no such thing as an investment that’s guaranteed to perform during a recession. Rather, these opportunities can provide a hedge and generate larger profits – or even just smaller losses – during an economic downturn.
Typically, recession-proof stocks pop up in industries that people can’t or won’t go without.
They may provide essential goods, like groceries, household cleaning supplies or internet services.
Others fit the category of “sin stocks,” such as alcohol, tobacco and even marijuana.
Examples of essential recession-resistant stocks include:
- Consumer staples, like grocers, food and beverage makers and wholesale stores
- Guilty Pleasures like alcohol and tobacco
- Shipping and transportation
- IT, communication and digital service firms
Recession-proof business models
Some business models are also uniquely designed to capitalize on declines, such as discount retailers or repair shops.
They may also find deals elsewhere – think Spirit or United Airlines, Poshmark instead of Macy’s or repairing tech and cars rather than switching to new models.
And if you’re feeling particularly thrifty, you might consider restaurants like Wendy’s and McDonald’s “discount” opportunities, too. After all, people still want to eat out when times are tough – but where they eat may have to change.
A few particular types of investments may also be more likely to perform during a 2023 recession.
For example, many economists and investment firms predict that bonds could see their first real heyday in years as interest rates climb to outpace inflation. Short-term US Treasuries and high-yield savings accounts may also present preferable alternatives to your regular savings and checking accounts for short-term cash needs.
Some investors also rely on riskier investments to see them through recessions. For instance, if commodity prices decline, investors may buy in at lower prices to ride the upside on the way out. Investors may also short-sell investments, or bet that a particular security will decline, to shore up their profits.
Q.ai can help quell your recession fears
Whether you’re wearing your consumer hat or your investor hat, recessions are often anxiety-inducing. But with some foresight and financial planning, you can prepare for these short-term blips on your long-term plan.
Of course, the usual advice applies: buff up your emergency savings, budget wisely, pay off your debts and don’t sell out at the first sign of decline.
We here at Q.ai believe that artificial intelligence can help investors make smarter, more timely investment decisions, no matter the economic climate.
With our Investment Kits, you’ll enjoy access to a diversified range of investments for any risk tolerance. You can build a solid foundation, invest for the future or simply keep up with current trends.
Better yet, our AI correlates your Kits to your overall risk tolerance to keep you on track to meet your goals.
Recession or not, those benefits are hard to beat.
Download Q.ai today for access to AI-powered investment strategies.