Coping with the Possibility of a Recession

American markets today, viewed several hours before the 9:30 a.m. Eastern time opening, appear poised for a mixed start with the S&P 500 and DOW barely in positive territory while the NASDAQ is in the red but improving with a chance of turning positive by or before market opening.

Traders and investors have tried to parse United States President Joe Biden’s announcement just after 5:00 a.m. Eastern time of a deal to supply Europe with more natural gas to help decrease its reliance on Russian fuels. The announcement was short on details and in the flurry after Biden spoke, at least one analyst termed it ‘unrealistic’. However, the stakes are so high, it is reasonable to believe that all parties will strive to make it work.

Canadian markets appear poised for a negative start with the TSX 60 and TSX Composite both hovering in the red.

European markets are open at time of writing and are mixed with the FTSE 100 swinging back and forth between positive and negative territory while the CAC 40 and DAX are firmly in positive territory, as these markets digest Biden’s announcement. By some estimates, Europe gets approximately 40% of its gas and 25% of its oil from Russia and European traders and investors there can be forgiven for some nervousness.

Amongst precious metals the safe havens of gold and silver are down.

Amongst currencies, the Canadian dollar the British pound sterling are down and the Euro is up against the American greenback.

Cheered by falling oil prices, a drop in new claims for jobless benefits and continued shrinkage in unemployment rolls, some investors moved tentatively back to riskier assets yesterday and extended the recent rebound. Amongst the winners, Nvidia Corp. shot up $25.16 to close at $281.50, not surprising since it has five ‘Hold’ ratings but 25 ‘Buy’ ratings and an average target price of$350.22

Still, longer range, the impact on Western public companies of the Russia-Ukraine crisis can only very broadly be assessed at this time, partially because of the confusing array of decisions and strategies. Investors can be forgiven for wondering where in the Russia picture the companies in which they have invested fit.

Yale Chief Executive Leadership Institute breaks the list of companies down into five categories:

  1. Those making a clean break such as Deloitte, Delta Airlines and Roku;
  2. Those suspending operations but keeping open the opportunity to return, such as 3M and Microsoft;
  3. Those reducing current operations such as Bacardi and BNP Paribas;
  4. Those buying time and holding off new investments such as Colgate-Palmolive and Dunkin Donuts;
  5. Those digging in and defying demands such as AstraZeneca and Lenovo.

At the same time, President Biden threw down the economic gauntlet even more than previously by declaring that Russia should be removed from the Group of Twenty.

"My answer is yes, depends on the G20," Biden said, when asked if Russia should be removed, according to a Reuters report. How Biden would get his wish remains unclear except that it will not be easy.

Equally confusing, several analysts have recently suggested the strong possibility of a recession which leads to questions about how investors can cope with it.

“Recession is likely in my view and investors should take advantage of the recent bounce to take some profits in large cap tech and move portfolios more defensively,” suggests Gavin Graham, Chief Strategy Officer at SmartBe Investments and. a 35-year veteran of money management. Graham explains that inverted yield curves such as we are approaching now have always seen at least a stock market sell off and usually a recession as it means the authorities are serious about slowing down the economy.

(An inverted yield curve occurs when long-term debt assets have a lower yield than short-term debt assets of the same general quality. This kind of curve reflects bond investors' expectations for a decline in longer-term interest rates, typically associated with recessions.)

Coping with the possibility of a recession means avoiding long-dated conventional bonds and acquiring inflation-protected bonds and short-term debt as well as investing in those equity sectors with pricing power offering some inflation protection such as energy, materials and consumer stocks – in other words companies supplying goods and services that we will need no matter what happens.

The possibility of a recession is not grounds for a panic but it does warrant a good hard look at portfolios. As I’ve said in previous columns: making money is the third goal of investing. The first goal is capital preservation and the second goal is to sleep at night.

Related: This is Not a Good Time for Speculation

Al Emid is a financial journalist, broadcaster and author with two books underway.

The Emid Report on Volatility 2022 – the next in the series -- is scheduled for release in Summer 2022 and his book on foreign investing is scheduled for release in January 2023.