Worried About a Recession? Do This

Worried about a recession? Do this... A warning for 'buy and hold' investors... You don't need to time the market... A thought experiment...

Imagine if you could perfectly time the stock market...

You would have sold your entire portfolio of stocks on October 9, 2007 – the day the last bull market peaked. And you wouldn't have gotten back into stocks until March 9, 2009 – the day the last bear market bottomed.

If you did that, you would have made a fortune.

With that kind of clairvoyance, you wouldn't have to worry about hand-picking the best stocks. You could simply invest in the broad market and never worry.

Say you put $100,000 in a tax-advantaged retirement account at the beginning of 2003 and invested it all in an exchange-traded fund ("ETF") that tracks the performance of the S&P 500, the SPDR S&P 500 Fund (SPY).

If you sold your entire portfolio at the exact market peak in 2007 – and held your cash while the market fell 57% over the next year and a half – and then reinvested it back into SPY at the exact market bottom in 2009, your investment would be worth more than $850,000 today.

You'd be sitting on a gain of 753%... more than eight times your money. That's almost triple the 282% return you would have earned if you had simply held on to your portfolio the entire period... a so-called "buy and hold" strategy.

Of course, no one can perfectly time the stock market...

The thing is, you don't have to.

As I (Mike DiBiase) will show you today, you don't have to be even close to timing it perfectly to beat a buy-and-hold strategy by a mile.

In other words, if you're a buy-and-hold investor, you might want to rethink your strategy. And if you're worried about a looming recession and its effects on the stock market, keep reading...

Today, we have lots of reasons to be worried about a recession...

Global economic growth is slowing... threats of a trade war are escalating... and recession warning signs are flashing all over the place.

As regular Digest readers know, one of the best warning signs just flashed earlier this month. I'm talking about the "2-10" yield curve, which just inverted. That's when interest rates on the 10-year U.S. Treasury sink lower than two-year Treasurys. This is not normal. When it happens, it has accurately predicted every recession over the last 60 years, as my colleague Vic Lederman explained last week.

If you've read my previous Digests, you know that I believe this yield curve inversion is going to cause banks to tighten their lending standards. And when that happens, I believe it will be the pin that pops the credit bubble and kicks off the next bear market.

Other warning signs are also flashing...

A much lesser-known but still reliable recession indicator also just flashed: sales of recreational vehicles ("RVs") are falling. RV sales are down 20% so far this year after falling 4% last year, according to the Wall Street Journal. Sales declines in two consecutive years have preceded the last three recessions.

And in our flagship newsletter, Stansberry's Investment Advisory, our proprietary complacency indicator has been flashing major warning signs since late last year. Our indicator correctly predicted nine out of the last 11 market corrections.

It's clear to anyone who's paying attention: We're on the cusp of a recession.

The problem is, no one knows exactly when the recession (and ensuing bear market) will begin...

You could make an educated guess by looking at past inversions...

From studying the past, we know that a 2-10 curve inversion doesn't lead to an immediate recession. On average, recessions usually follow inversions around 18 months later.

As my colleague Steve Sjuggerud likes to remind readers, if you got out of the market every time the yield curve inverted, you'd miss out on some huge gains during the final "Melt Up" phase of the market.

He's right... The stock market rises around 22% on average after the yield curve inverts. That means if history is any indication, the S&P 500 would reach an all-time high of around 3,500 before the next bear market begins in February 2021.

Of course, relying on averages doesn't always work. Sometimes, recessions come much sooner. (Back in 1980, the stock market peaked less than three months after the yield curve inverted.) And sometimes, they come much later. (The yield curve inverted around 22 months before the dot-com crash of 2000.)

All you need to know is that it's better being early than it is being late. Recessions cause bear markets. And the stock market can plummet... fast. As I'll show you in a moment, doing something to prepare for the next recession and bear market is better than doing nothing at all (i.e. "buy and hold").

And again, you don't need to know exactly when it will strike.

Let me show you what I mean...

The last time the 2-10 yield curve inverted was at the end of January 2006. Back then – like today – investors were nervous about an impending recession. The stock market continued to rise another 22% over the next 18 months.

Now, this might surprise you...

Let's go back to our example of an investment in SPY at the beginning of 2003. If you had pulled your money completely out of the market right after the yield curve inverted in early 2006 – a full 18 months before the last bear market began – and waited to get back into stocks again until 18 months after the market's bottom in late 2010, your return would have been 336%, a full 54 percentage points better than the return of a simple buy-and-hold investor.

Keep in mind, that's missing the top and bottom of the market by a full year and a half. And it assumes you earned nothing on your cash while you were out of the stock market for more than four years.

(In reality, you wouldn't just sit on your cash while you waited for the market to bottom. If you invested in short-term Treasurys while you waited, your return would have been 382%, 100 percentage points better than a buy-and hold investor.)

But you could have done even better than that...

Besides shorting the S&P 500, can you guess which investment strategy fared the best during the last bear market?

While almost all stocks got crushed, gold and gold mining stocks were the best investments you could have made. Gold rose 25% during the bear market, versus a 9% return for short-term Treasurys.

If you instead invested in gold while you were out of the market in our hypothetical example, your return would have been an incredible 821%... more than five times higher than the return of a buy-and-hold investor.

The results are clear: Gold is the way to go if you're worried about a bear market.

By investing in gold, you don't have to be close to perfectly timing the top and bottom of the market. There's nothing magic about 18 months in our hypothetical example above.

I ran the same analysis many different times, varying the number of months before the market peak and after the market bottom from two months to 36 months.

Amazingly, if you simply bought gold while you were out of the market, you would have beaten a buy-and-hold investor every single time. You don't need to know exactly when the next recession or bear market will arrive.

Many people are buy-and-hold investors in their retirement savings plans. They assume that they'll be able to weather the ups and downs of the market over time. And they tell themselves that market downturns work in their favor because of dollar-cost averaging (meaning you can buy more shares when prices are cheaper with the same amount of money).

I even ran the numbers assuming regular contributions every month. It didn't matter... You're still better off than a buy-and-hold investor.

If you believe a recession is coming, you should start preparing.

Now, I'm not recommending you move completely out of stocks today...

The bull market could go on much longer. The Federal Reserve will likely lower interest rates at least once more this year (and probably several more times) before this cycle is over.

But you should reduce your exposure to stocks. And you should start raising cash and investing in gold.

Fair warning, though: The majority of retirement plans won't let you buy physical gold. But you can buy a gold ETF that tracks the price of gold, like the SPDR Gold Shares Fund (GLD).

There's a better way to add gold to your portfolio, though...

I'm talking about investing in high-quality gold miners. When gold prices are rising, mining stocks vastly outperform gold.

And no one knows how to identify these stocks better than my colleague John Doody.

Regular Digest readers know Stansberry Research recently acquired John's Gold Stock Analyst newsletter. It was a huge coup for the company. A few years ago, Porter called him "a living legend" and lamented the fact that we didn't publish his work.

John's long-term track record is undeniable. Since 2001, his gold-stock strategy has outperformed gold, the PHLX Gold/Silver Sector Index ("XAU"), and even the S&P 500.

In short, if you want exposure to gold stocks, you need to follow John's advice. And for a limited time, Stansberry Research readers can gain access to John's Gold Stock Analyst: Pro newsletter for $1,000 off the regular price, plus a free year of Gold Stock Analyst: Silver (a $3,500 value).

Even better, John is so confident about the bull market in gold that he's making an incredible guarantee that could net you a free year of his service. Get the details here.

A recession is coming. It's time to start preparing now.

New 52-week highs (as of 8/28/19): Alexco Resource (AXU), New Oriental Education & Technology (EDU), Barrick Gold (GOLD), Home Depot (HD), Hershey (HSY), Coca-Cola (KO), Leagold Mining (LMCNF), MAG Silver (MAG), Medtronic (MDT), Nestlé (NSRGY), PepsiCo (PEP), Procter & Gamble (PG), Polymetal (LSE: POLY), Royal Gold (RGLD), ResMed (RMD), Seabridge Gold (SA), Sabina Gold & Silver (SGSVF), Silvercorp Metals (SVM), Stryker (SYK), Torex Gold Resources (TORXF), Vanguard Inflation-Protected Securities Fund (VIPSX), Belo Sun Mining (VNNHF), and Wheaton Precious Metals (WPM).

In the mailbag, three more subscribers share their varied opinions on Steve Sjuggerud's pitch to retire the penny. What's on your mind? Drop us a line at feedback@stansberryresearch.com.

"I'm a Canadian who has lived (and worked) in many Western countries and many Asian ones. I'm back in Canada now and wonder every time I shop across the border, 'Why are they still using pennies?' For me the question is get rid of all 'metallic change'.

"Austrian had no change or small bills even when I worked there about 25 years ago. No small purchase machines too coins. Everyone had card to use where the money to buy even a bit of chewing gum came out of your bank account directly.

"Who are the people in power playing? Who is playing the government? Dump it. Here is Canada they haven't changed cash registers. The cashiers just round up or down on the final bill." – Paid-up subscriber Mike M.

"Sirs: 'U.S. government lost $120 million' fabricating pennies and nickels. So what. That sum is but a rounding error in the federal government's deficit spending." – Paid-up subscriber Rod B.

"Hey Steve, I have a question, if they do retire the penny will they then not be worth anything? or will people maybe hoard them more for ?? reasons? Is there ever a reason to think we'd run out of copper? That's what pennies are made from right or partly?

"What on earth will I do with all the ones that I have for some unknown reason collected in the many yrs in jugs, cans, jars etc. over many years. I guess I've just collected them cause who wants to be bothered with them and I just never get around to bringing them to the bank or anywhere else.

"I do however agree that spending 2cents to make something that's worth 1cent is both stupid and uneconomical. The gov certainly does know how to waste money that's for sure. You can take that to the bank!" – Paid-up subscriber Karen T.

Steve Sjuggerud comment: The government could phase out the penny in a few ways. The simplest would be announcing a plan that the penny is no longer legal tender. Then, anyone who owns pennies would have, say, three to six months to deposit them at his bank.

After that window, pennies would be worthless as money. Sure, people could hoard them. But I'm sure plenty of folks wouldn't be hassled to drop off their loose change at the bank. So they likely wouldn't end up being that rare.

These days, pennies are mostly made of zinc, not copper. And if the world runs out of either metal, penny production will be the least of our worries. My point on retiring the penny is simpler than that, though...

The government actually loses money producing the penny. It loses money producing money! That's nuts.

Even worse, it's the most useless form of money we have. No one would notice if the penny was gone tomorrow. And the government would save millions if it stops producing them. That's reason enough to kill the penny now.

Regards,

Mike DiBiase
Atlanta, Georgia
August 29, 2019