How to Protect Your Savings if a Recession Is Coming

A reversal in Treasury yields has stoked investor concerns that a recession could be on the horizon, but strategists say there are steps you can take now to protect your savings.

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With a historic indicator of recessions flashing red this week, financial experts have shared their best advice on how to protect your savings — and even invest — if an economic downturn is just around the corner.

On Monday, the performance of the The five-year Treasury rose above the interest rate on 30-year bonds. US government bonds for the first time since 2006. While not the most widely watched spread between the 2yr and 10yr, it was still a yield curve inversion, which may indicate a lack of health confidence. of the economy

And it’s not just the bond market that’s nervous about the possibility of a recession. famous investor Carlos Ican and economist Mohamed El-Erian both told CNBC last week about their fears of a recession. They expressed concern that the Federal Reserve’s attempts to rein in inflation, by potentially raising interest rates even more aggressively than initially planned, could in fact lead to further economic damage.

So what can you do at this stage to help protect your savings in the event of a recession?

Investments in drip feeding

Sarah Coles, senior personal finance analyst at UK investment platform Hargreaves Lansdown, said it’s still worthwhile for younger savers to make sure some of their money is invested in the stock market, particularly as it offers a better opportunity to generate returns above inflation.

“It’s almost impossible to predict exactly when the next recession or market crash may occur, and postponing investing because of something that may or may not happen can spell disaster,” he told CNBC via email.

For those concerned about investing their savings in a lump sum, Coles recommended trickling money into the stock market, as this allows them to “benefit from the cost averaging of the pound by continually increasing their investments through different market conditions and business cycles”. The pound, or dollar cost averaging, is the idea of ​​making regular contributions to your mutual fund to smooth out any potential stock market volatility.

If you plan to invest your money for less than five years, Coles said these savings should be kept in cash. She said people should be sure to shop around for the best cash savings account interest rate, to try to minimize any erosion of value inflation.

At the same time, Coles cautioned against getting too carried away trying to predict how interest rates might change in the coming months or years: “Your goal should be to get the best rate you can right now, over the period of time you make the most profit.” sense for your circumstances.

Invest amid rising rates

As for what investors should do with their portfolio, Schroders investment strategist Whitney Sweeney said “diversification is key, as is patience.”

She said this was important as market volatility remained, with the Russia-Ukraine war still unresolved, and as central bank rate hikes have become even more important to investors over the past week. Fed Chairman Jerome Powell said last week that the US central bank. raise interest rates more aggressively in an effort to moderate inflation.

“If this all seems a bit ambiguous and confusing to investors, that’s because it is,” Sweeney told CNBC via email. However, he added that while there have been few cases where the yield curve has inverted and there hasn’t been a recession, it’s important to note that it hasn’t always happened.

Like Icahn, Sweeney stressed that the key question was whether the Fed could “engineer that soft landing” in its tightening of monetary policy to combat inflation, without pushing the US economy into recession.

He noted that commodities, along with “value” and “cyclical” stocks are among the investments that have tended to perform better amid rising interest rates. Value stocks are those companies that are considered to be trading at a lower price, despite their strong fundamentals and return potential. Meanwhile, cyclicals are companies that see their share price performance fluctuate with the economic cycle.

‘The jury is still out’

Other strategists CNBC spoke with also echoed Sweeney’s point that a recession is far from set in stone, even with yield curve inversions.

For example, Wells Fargo macro strategist Erik Nelson told CNBC in a phone call that there was a reversal in the mid-1990s that was not followed by an economic downturn. In addition, Nelson noted that there can be a long lag of 12 to 24 months from when the yield curve inverts until a recession hits.

Nelson also emphasized that the yield curve itself was not a cause but an indicator of a recession, and that it was more important to look at what was happening with Fed policy.

He explained that it was when the Fed’s benchmark funds rate, currently in a range of 0.25%-0.5%, was raised to a “restrictive level” that the recession could become a real concern.

In fact, buying stocks when a central bank begins to unwind could often deliver “pretty strong returns” at the end of a tightening cycle, Nelson said.

“So I don’t think you want to start selling stocks when the curve inverts, you want to sell stocks once the Fed starts saying ‘I think we’re probably done tightening,'” he said.

ING Senior Rates Strategist Antoine Bouvet said many economists were forecasting a 20-30% chance of a recession, but added there was cause for concern.

The speed and amount by which the Fed could raise rates, along with a hit to consumption from rising energy prices and a “softening” of housing market indicators, are among those concerns, he said. Bouvet.

“You don’t know yet if that recession is coming, but this is something that’s on everyone’s radar,” he said.

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