Signs of an Economic Recession in 2017?
Next year, we will see a recession.
I’m calling it.
Tiger Legatus Master Fund was up 0.1% net for the second quarter, compared to the MSCI World Index's 7.9% return and the S&P 500's 8.5% gain. For the first half of the year, Tiger Legatus is up 9%, while the MSCI World Index has gained 13.3%, and the S&P has returned 15.3%. Q2 2021 hedge Read More
Why? Well … there are just too many events unfolding this year that will set the stage for a recession, including a corporate earnings recession, a growth-stunting Brexit vote and a U.S. presidential election unlike any we have ever experienced.
Any one of these events could be the direct catalyst for next year’s recession, or it could be one of the many other reasons not listed.
While I can’t predict the exact catalyst for the event, I do know that I’m not the only one expecting the worst.
In fact, according to a recent report, companies are preparing for a recession as well … and you should be doing the same.
In the latest durable goods advance estimate for June, orders tumbled 4% versus expectations of a 1.7% decline. Durable goods orders represent orders for products that last typically for at least three years, like appliances, office equipment, motor vehicles and turbines.
Earlier this month, I explained how declining durable goods orders mean that the Federal Reserve’s hands are tied, and that interest rates are not going higher by any meaningful degree for at least another decade.
This remains true, but you also have to be prepared for the inevitable — a recession.
Falling Corporate Confidence
I follow durable goods because it tracks corporate spending on items that can be considered an investment. In other words, it represents corporate investment outside of mergers and acquisitions, employees and other big-ticket spending.
Essentially, durable goods orders tell us how confident companies are in growing their business — rising durable goods orders show confidence the economy will continue growing, while falling orders signal a shrinking economy and curtailed spending.
During the past two decades, durable goods spending has only slowed from steady increases on two occasions.
The first was a precursor to the 2000-2001 recession. The second was in the midst of the 2008 global financial crisis.
Today, we are seeing the same thing happen again. The latest durable goods report shows that companies still have no confidence in the economy and are not increasing investments in this environment.
You can see that from 1992 to 2000, roughly eight years, durable goods orders rose at a choppy but steady path. From 2001 to 2008, roughly seven years, we see the same thing — choppy but steady growth. And from 2009 to 2016, about seven years, we saw similar results.
There’s a pattern here, and each time durable goods orders slow or turn lower, it signals an imminent recession — today is no different.
Be Prepared for the Recession
Your takeaway here is simple: Prepare for a recession-like investment environment.
That means you want to own safe-haven stocks — think gold-related stocks, utilities or telecommunication companies, bonds and even some blue-chip stocks.
But the main thing you want to consider, if you haven’t already, is to find a strategy for profiting from declining stocks.
Depending on how you manage your money, this can be easy to do. If you are managing your own portfolio, a long-term put option on the SPDR S&P 500 ETF (NYSE Arca: SPY) (expiration in 2018 would be ideal) is a simple way to profit from a recession and decline in stocks.
If, instead, you have an adviser who manages your portfolio, tell them you want more bearish exposure, assuming you have little at the moment. It’s your money, and they will listen and help you prepare for the imminent recession. They should be able to put your investment in some simple bear funds that benefit from a market fall, or they might also consider buying an inverse ETF that returns the opposite of the underlying equity.
Just keep in mind that these positions are used as protection to hedge your portfolio from a crash. The further we get into 2017 without the expected stock market crash, tilt your portfolio more and more to positions that will rise when the crash hits.
A crash is coming. It’s just a matter of when, not if.