By Andrey Dashkov, analyst, Casey Research
This current market isn’t promising.
Investors expect slow economic growth and higher interest rates.
Both are bad news for stocks.
Slow growth could mean lower future company earnings… And higher interest rates, hiked to combat inflation, could prompt investors to switch from stocks to bonds.
The latest news from Ukraine isn’t reassuring, either… The war continues, and it looks like it will do so for months (if not years).
So, are we in a bubble that’s about to burst?
Should you sell your stocks right now?
Let’s see what’s going on…
The Market Is in a Bad Mood
Fund managers are not optimistic.
A recent Bank of America survey of fund managers looks bleak.
Seven out of 10 predict a weak economy over the next 12 months.
This number hasn’t been this high since 2008.
Does this mean that something even worse than the Global Financial Crisis of 2008 is about to happen?
Maybe… but I wouldn’t bet too much on this survey’s data. It reveals investors are on edge.
Which means their opinions could be easily swayed.
But it’s true that in this state of mind, these fund managers are more likely to sell their equities than add to their positions.
So, watch out for buying opportunities among some of the most recession-resilient stocks. The market looks like it’s about to start giving away pretty good bargains.
Also, hold some cash to add to your favorite positions.
No Place to Hide, Except…
Broad market indexes such as the S&P 500 don’t offer much safety for investors looking to protect themselves from volatility and a possible economic downturn.
Bonds aren’t the best investment right now, either.
As interest rates rise, bond prices decline.
As a reminder, this is one of the most established relationships in the market. Bond prices and their yields are inversely related.
If you buy a bond today and interest rates go up in the future, the bond’s price will fall. So if you sell it before maturity, you will lose money.
One type of bond, the Treasury Inflation-Protected Security (or TIPS), does provide some measure of inflation protection…
But it’s so expensive you’ll make next to nothing if you hold it to maturity. To get a positive yield, you need to buy the 20-year ones, and their current yield is just 0.35%.
A five-year one has a yield of -0.53%. If you buy them, you’re guaranteed to lose.
What to do, then?
Well, look at it from these two angles.
First, think of which assets do well in a recession.
Second, consider the ones that move independently from the rest of the economy…
Finding the Hottest Corners
Here at Casey Research, we have been fans of commodities for a while. Right now, the hottest corner of this market is what my colleague Dave Forest calls “hard tech,” the commodities that are used in high-tech applications like electronics or electric vehicles (EVs).
Innovation is impossible to stop regardless of whether the U.S. GDP loses some percentage points of growth or not.
Unless there’s a global catastrophe, Apple will release its new iPhone this year, and they will be faster and more capable than the previous models.
As a result, “hard tech” would be my number one pick.
But you also want to make sure you’re diversifying your portfolio. From what I see and the asset manager surveys quoted above, it looks like the market is nervous.
So, volatility could spike at some point this year.
And there’s a way to profit from that. Like anything else, you can trade volatility.
And to bet on it going up, consider an exchange-traded note (ETN) like the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX).
ETNs represent debt instead of equity. But this debt isn’t protected from the loss of principal. Investing in volatility is risky, so beware of that.
But VXX is one of the easiest ways for investors to profit from a potential spike in the “fear index,” VIX. As a reminder, VIX is an index that represents future volatility. If the market is on edge, VIX could rise.
And I’m seeing a lot of uneasiness in the market. We don’t know what may trigger the next round of high volatility, but when it happens, it could pay to have a position in VXX.
Analyst, Casey Research
P.S. It’s true that inflation is very steep right now. You feel it at the pump, with record-high gas prices. And you feel it at the grocery store, with record-high food prices.
For additional ways to profit… and protect yourself from slow growth coupled with high interest rates… I urge you to check out Dave Forest’s 3-step plan right here.
It will help you prepare for the months and years ahead.