For the past few months, it feels like we’ve been reading the Federal Reserve’s tea leaves.
We’re watching and waiting to see how the Fed’s next move will affect interest rates, the market and the economy at large.
Now that inflation is at 8%, we’re also approaching recession territory.
But that’s not entirely bad news.
In today’s video, I’m sharing:
- Current and past market data that points us toward a recession.
- What a history of bear markets from the last nine decades tells us about our economy right now.
- What major market sector stands to make the most profits coming out of a recession.
Even though stocks are beaten down, I’m looking for the best investments now that could start to soar when the market turns.
Find out more on today’s Winning Investor Daily video:
If you’d rather read a transcript, here you go!
How to Invest Your Money in a Recession
First, we are going to address the idea of whether or not we’re in a recession.
If you do believe we’re in a recession, of course we’re already in a bear market in stock, as you’ve seen with the Nasdaq down and the S&P both down over 20% this year.
But then the question is:
What should you buy? And what performs best coming out of a bear market?
I’m going to share some data with you that really is unbelievable. But first…
Are We in a Recession Yet?
Let’s talk about whether or not we’re in a recession. I want to pull up this chart of the U.S. Index of Consumer Sentiment.
This comes from the University of Michigan. This dates all the way back to the 1950s. Basically it’s a survey of how consumers are feeling.
It’s conducted once a month. It’s been very indicative. It foretells recessions. If you look at this, all of these gray lines here in the chart — the vertical gray lines — indicate a recession.
Going way back to the 1950s and 60s, we had three recessions in the 50s and then early 60s.
You didn’t see a huge drop off in the consumer sentiment. But things started changing in the 70s. You saw a big drop happen and then a recession in 1973-75. You had a recession in 1980, of course, when Paul Volcker raised interest rates to curb inflation.
Then you had a recession in the early 90s it was predictive of. The one that really wasn’t predictive was the recession after Dot-com, which was pretty short lived considering that the government after 9/11 started pushing money into the markets.
Then you had the Great Financial Crisis in 2008 and 2009 where sentiment dropped to about 50. You had a mild recession in 2020 during COVID and consumer sentiment fell off.
Right now, consumer sentiment is at the lowest it’s been since the 1980s. We’re at a 50 reading right now.
2022 Inflation & the Federal Reserve
One of the reasons for that is because interest rates are moving up as fast as they were back then. Inflation back then was running double digits. Now, at 8%, we’re pretty close to it. This is foretelling that we are heading into a recession right now.
In fact, that’s what the Fed is trying to do. They are trying to create a recession, so inflation comes down. This is the whole point of them raising rates at the fastest pace in history, to stop consumers from buying so many goods and bringing the cost of goods down.
The question is, if you do believe we are heading into a recession (which is what I believe), and you do believe we are in a bear market (which is obvious), what is the sector that outperforms after a recession?
So from the bottom of a bear market, what is the sector that will best position you for huge gains?
Small-Cap Stocks: The Sector that Profits After Bear Market Recessions
Now I’m going to go back to a chart that I am going to share from French and Shiller. They are two economists. This shows the performance of small-cap value from bear market bottoms. If you look at this, you can see in the 1930s after the Great Depression and then the recession, the economy started to recover.
You saw a massive rally in small-cap value stocks into the mid-30s. In April 1932 was the bear market bottom. These stocks were up 1,200% in five years off the lows. That’s the index up 1,200%. Individual stocks were probably up 5,000% and 10,000%.
Then in the 1960s, there was a bear market bottom in April 1962. You saw small-cap value greatly outperform. As much as 5005 returns in small-cap value from about six years off the lows.
Then in the 1970s, small-cap value, which is the green line, and the S&P 500 kind of tracked each other.
Then, in the mid-70s, small-cap value took off, rising 400% from the bear market lows. Then again in 1974, this was a big one. Between 1974 and 1984 — 10 years — small-cap value stocks gained, on average, 1,500%.
Then in 1987 after Black Monday, you had them rise about 500% in six years. Then in December 2002, you had them outperform for four years. Then they fell with the Great Financial Crisis and then they rallied again. So a 200% return you’re looking at in eight years.
Then again after the bear market lows in January 2009, small-cap value has tracked much closer to the S&P 500.
But I think this is going to change. I believe small-cap stocks, especially the ones that have enough cash to get through the bad times on their books, are the best position stocks to buy right now.
Why Small-Cap Stocks Make the Best Bear Market Investments
Historically, small-cap stocks are as cheap as they have been since the early 90s. You can check out my research on that. We also did a webinar earlier this week where we shared that data with you. So check out my Winning Investor Daily videos.
Lastly, how do you pick these stocks? We looked at a bunch of different factors. We put some research together to find the small-cap stocks that have best performed to do well once the bear market bottoms. We put together a special webinar.
Please check it out: Bear Market Fortunes. We present all our research in it.
Any questions or comments, please feel free to leave in the comments below.
Stay tuned:
This week on RAD: Tomorrow we share the results of last week’s poll, and you shared your thoughts on central bank digital currencies (or CBDCs).
Have a great weekend!
Regards,
Ian King
Editor, Strategic Fortunes