Since July we’ve tracked key metrics that often lead to a recession. Month over month we’ve seen housing permits, money supply, and profit margins start to lag which typically leads to cautious or recession territory. However, other indicators lead us to believe there isn’t a recession including jobless claims and gross domestic product (GPD). But this past week the yield curve inverted, making the 3-month Treasury Bond at 4.04% surpass the 10-Year Note at 4.01%. This new information often means a recession will follow within six to eighteen months. So, with the possibility of a recession, what can you do to prepare?
First, evaluate your time horizon to make a strategic withdrawal. A traditional recession will last approximately 10-18 months. So, create a new plan where you withdraw a lump sum and deposit into a high-yield savings account. Oftentimes online accounts are offering higher rates than brick and mortar. For instance, bankrate.com has an online offer of 3 percent and most brick and mortar are closer to .05 percent. The purpose is to stop the dreaded sequence of returns and earn interest during declining market conditions.
Second, if you are contributing to your retirement accounts, adjust future contributions to a stable value fund rather than auto investing. A stable value fund is a portfolio of bonds that are insured to protect the investor against a decline in yield or a loss of capital. This will help protect your incoming investments from loss during more volatile periods. Once you make the switch, you’ll also need a plan to reenter the market. Your risk tolerance can help guide you or you can reach out to a financial advisor for additional assistance.
Lastly, if you haven’t already started a savings fund, do it now! During a recession, lending processes become more scrupulous and it’s more difficult to get funds in a crunch. Many people save using their bonuses but start to save more regularly with your base paycheck. These regular transfers to a savings account will help you in the long run.
The last time the yield curve inverted was in March of 2020, however, it was abnormal as it only lasted two months and it’s unlikely that we will be that lucky again. What makes this difference this time is inflation and interest rates, a past we’ve known all too well. If you need help with a plan for your income stream or investable assets, book an appointment with KJ Dykema, MRFC® today. I can customize a plan to make sure you weather this inevitable storm.