One is here already. The other is lurking right around the corner. Which should worry investors more?
It’s a question that’s increasingly hard to ignore as the twin troubles of inflation and recession loom over portfolios and pocket books. U.S. prices in June rose the most since 1981. And the odds of a recession in the next year are now close to 50%, according to Bloomberg’s monthly survey of economists.
Inflation and recession are closely linked: To battle high prices, the Federal Reserve could raise interest rates so fast that it triggers an economic slowdown. This isn’t the case yet, at least not formally, and central bank officials are still saying a so-called soft landing is “very plausible.”
Given all this, should you be positioning your portfolio more for continued inflation or an imminent recession?
Focusing On Inflation
There is no doubt we’re living in an inflationary era. This is why some advisers think it should be top of mind for investors, rather than a hypothetical recession.
“Inflation has a tendency to hit individuals immediately,” said Dana Menard, founder and lead financial planner at Twin Cities Wealth Strategies. “It’s the ‘now,’ especially for those that are nearing retirement or need to make a large purchase.”
It’s important to prepare for recessions too, Menard said. But part of financial planning involves minimizing the agony of fretting over every possible eventuality. Having an emergency fund can allay concerns about an economic downturn and allow you to focus instead on setting a responsible budget and investing in a market that’s been battered by inflation.
Investing in this environment is difficult given that we’re likely in “the eye of the inflation storm,” said Mike Bailey, director of research at FBB Capital Partners. He recommends buying energy and financial companies since they benefit from higher prices.
It’s also a good time to make sure your cash is earning income for you, rather than losing value to inflation. High-yield savings accounts are increasing their rates, while U.S. Series I savings bonds currently offer an annual interest rate of 9.62% if you’re willing to lock up your money for at least a year.
Case For Recession Planning
While high prices are a pain for consumers—and have put pressure on stocks—some money managers argue that investors should be paying more attention to the warning signals of a recession.
“Inflation should be largely ignored by investors as it is something that they do not control,” said Erik Baskin, founder of Baskin Financial Planning in Ohio.