Investing in a Low-Growth Economy: Strategies for Long-Term Success

 If you google, as I did, the title of this article, you will, of course, get numerous results. But after I viewed page after page of entries, it seemed that nearly every entry centered on planning for a recession. This is not inherently a bad idea since the U.S. has had 15 recessions since the Depression. 

However, while reviewing that list, it becomes clear that recessions are illusive phenomena, triggered by numerous events, both domestic and global. 

This time last year, many in our profession were predicting a recession in 2023 for any number of reasons. Whether from a continuing strong jobs market or the Fed’s rate policy seeming to help cool inflation, it never happened. The result? Recession talk has now moved to 2024. So, what’s my point, and our counsel to investors? 

Rather than plan for a recession that may or may not come in the next year, or beyond, create a financial plan for the economy we are living in RIGHT NOW. That is, a low-growth economy grinding along with inflation at 3-4%, unemployment at around 4%, GDP growing at 1-2%, and the cost of borrowing money at 6-8%. And, recession talk aside, it is most likely an economic environment we are going to be in for a while.

So, how can investors work a low-growth economy to their advantage? For starters, stop hoping interest rates will go down. At the time of this writing, the Fed has paused rate increases, but has hinted that there may be more to come. Of course, if there actually is a recession next year, the Fed will lower rates to heat up the economy. But we’ve covered that possibility already. So, instead of wishful thinking, here are a few strategies to consider in this low-growth economy.

1. For equity and stock market investing over the next 12 months, look at overseas investments. Consider that the S&P 500 is trading at 19 times forward earnings, while overseas markets are trading at 10-12 times forward earnings. So, make sure you are looking not just at the U.S. but at Europe, in particular, as an investment opportunity. 
2. In our view, the biggest opportunity is in the bond market. We are looking at a corporate bond yields of 5.5-6%, and a municipal bond rate of 3-4 %. So, if rates do go down for any reason, you have locked in that rate for the next six to seven years. Also, keep some money in short-term treasuries at 5.5%, and you can move that money into other bonds if rates go higher or into stocks if equity prices drop. 
3. In a low-growth economy, you will want to build more cash flow into your portfolio, which is easier to do in today’s market. Focus on yields with alternative strategies, such as private debt and covered calls. At the time of this writing, yields in these strategies are in the 8-11% range. 

As we all know, trying to predict the future is a risky business. Of course, that does not mean you do not prepare for whatever it may bring. Implementing a financial strategy that allows you to take advantage of current market opportunities will not only help protect your investments in the event of a  recession but will also put you in a position to have a well-diversified portfolio regardless of whether a recession arrives.