With a recession on the horizon, investors need to consider a different investment strategy. In today’s FA Alpha Daily, we’ll discuss an investment vehicle that outperforms stocks during recessions.
FA Alpha Daily:
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Remember, a hard landing is just the modern language for a recession. And when it happens, one other thing is pretty much guaranteed to happen, a bear market for stocks.
When the dot-com bubble burst, the S&P 500 dropped 49% from its all-time high.
In 2008, it dropped 57%.
And during the pandemic, stocks lost over 30% in just a month.
All the major indexes seem to be catching on. That could be a sign that the market is starting to roll over.
Since 1950, bonds have crushed stocks during recessions.
Bonds differ from stocks in that they offer fixed interest payments over their duration. And at the end, you’re guaranteed to get your original investment back. This predictable income stream acts as a buffer against market uncertainties.
Bondholders are also positioned higher up in the hierarchy of financial claims. This means they get priority over stockholders in the event a company goes bankrupt.
Unlike stocks, all of this is protected by legal contracts. Once you buy a bond, you know exactly what your return will be as long as the company stays afloat.
This legal assurance of payment, combined with regular interest income, makes bonds a reliable and far more defensive asset.
That’s why bonds have returned over 10% per year during the last 70 years of recessions while stocks fell.
Bonds aren’t just risk-averse, they are highly profitable as well.
While folks typically think of bonds as low-risk, low-return, that’s not always the case.
These panic times create opportunities for double-digit yields in bonds and sometimes triple-digit gains.
When the stock market panics, many others briefly follow suit. That means bond prices can plummet.
This creates an environment where perfectly safe bonds can be bought at significant discounts.
But as we mentioned, bond investors know exactly how much they’ll get paid ahead of time.
Furthermore, if the market’s sentiment eventually stabilizes or if the issuer’s financial health improves, bond prices can rebound sharply.
So, while we still might have some time before the hard landing is here, we’d recommend you familiarize yourself with how bonds work.
It’s the perfect time to understand the landscape. When we officially enter a recession, there will be plenty of cheap, safe bond opportunities to keep your portfolio happy.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
U.S. stocks are in CODE RED–and you’re about to learn why! We are inviting you to attend our upcoming event this Wednesday, October 4, 2023 at 12:00 PM CT to learn how to protect your wealth in the oncoming stock market crash.
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