Are You an Optimist?

Optimistic investors are pushing financial markets toward record highs, yet 93% of American CEOs reportedly are being cautious and believe a recession is on the horizon.

Why the dichotomy?

Many short-term investors see the Federal Reserve (Fed) successfully fighting inflation. This optimistic group anticipates maybe one or two interest-rate increases before the Fed starts cutting them in 2024. They envision the successful fight against inflation will result in around 2% annual inflation with interest rates heading for 3% to 3.5% in 2025.

They are investing today for that result.

In their minds, today’s stock prices are justified because the Fed is orchestrating the proverbial soft landing—taming inflation without causing a deep recession. The optimist sees further stock-price appreciation resulting from future stable lower interest rates, 2% inflation and growth in future corporate profits.

However, being wrong about a soft landing has consequences.

If the 93% of American CEOs are correct about a recession, according to a Conference Board survey released in May, this suggests a hit to profits within the next 18 months and falling stock prices.

Many CEOs worry that stubborn inflation will force the Fed to maintain higher interest rates well into 2024. That could prompt U.S. consumers to cut their spending, while small to mid-size businesses would face higher borrowing costs and less cash for reinvestment in their companies. In this scenario, short-term investors might lose 10% to 15% from today’s values.

Prudent investors usually don’t worry about that kind of loss. They’re in it for the long haul. They wisely understand that once the economy recovers, whether in a few months or a few years, the stock market’s value also recovers.

Pragmatic investors look for opportunities in times of uncertainty—just like today. Here are five tips:

1. If interest rates go down over the next few months or years, which is likely, now is a good time to make certain your bond portfolio is fully allocated.
2. Higher interest rates, appreciating home values and a shortage of housing in general have made homebuying more difficult, particularly for younger generations looking to make their first purchases. In certain parts of America, this could be an investment opportunity for multi-family housing.
3. Productivity gains are key to future economic growth. New ideas, products and innovations are part of, if not the answer to this conundrum. This argues for venture investing when the pricing of those ventures favors investors, which is right now. History shows that when fewer venture dollars chase these opportunities, these funds tend to yield higher returns.
4. Some stock market sectors today have potential for long-term growth and nice short-term returns via dividends when compared to non-dividend paying stocks, which tend to suffer more in price depreciation during downturns.
5. Oil and gas companies, despite being demonized by many, will be needed for consumer and industrial uses for decades to come. Owning reserves with today’s economics for pricing suggests a very nice return for a long time.

Remember, prudent investors plan for the long term with diversified portfolios filled with savvy investments. The best portfolios are designed to meet current living expenses—including a nest egg for emergency and special needs—and can withstand an economic downturn while avoiding the anxiety faced by overly optimistic short-term investors.

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