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6 actions investors can consider during an economic slowdown

Anthony Saglimbene, Chief Market Strategist – Ameriprise Financial
As of Oct. 21, 2022

Although the U.S. economy has shown remarkable resiliency this year in the face of slowing growth trends, this is not the environment to be adding to risk more broadly, in our view. Instead, investors should consider incorporating a few downside portfolio tactics into their investment strategy if they haven't done so already. Here are a few portfolio strategies we believe can help weather economic downturns.

Here are a few portfolio strategies we believe can help weather economic downturns.

1. Tactically shift stock and bond positioning toward the U.S.

The U.S. often acts as a port in the storm and can provide "relative" stability when uncertainty is higher or global growth conditions are slowing, as they are today. In our view, the U.S. is further along in its normalization process, the downturn here at home may be less severe relative to Europe/emerging markets, and the U.S. has a higher concentration of companies with more visible profit streams and secular drivers to growth. In addition, we expect the U.S. to be one of the key areas to lead the world out of an economic downturn.

2. Within stocks, focus on investment quality/income

Focusing on investments that concentrate on stable or growing profits, even when economic activity is shrinking, can provide relative outperformance versus assets more materially affected by a downturn. Notably, income generation tends to become a more prominent component of the return equation in a low or negative return environment. Defensive sectors such as utilities and consumer staples offer solid dividend-paying options, as do the financials and health care. Even technology can provide exposure to companies that are systematically paying and growing their dividend. But investors should be selective about the investments and companies they choose here and could tie the quality and income themes together to help add a defensive posture while maintaining equity diversification.

3. Don’t discount the value of diversification

A risk-based portfolio approach comprised of stocks, bonds, alternative investments, and cash often helps mitigate the slide stocks face in an economic downturn versus an all-stock portfolio. Unfortunately, stocks and bonds have come under pressure this year, reducing the diversification benefits of a simple 60% stock/40% bond portfolio. While this phenomenon is rare in history, declines across bonds have been less severe than equities this year. Also, alternatives and cash have helped add a layer of relief to a well-diversified portfolio. Taken in total, a diversified four-asset portfolio has typically lost less than the overall stock market this year and reduced volatility. We believe these principles should hold if economic conditions worsen.

4. For stability, look to high-quality bonds, which are becoming more attractive longer-term

The 10-year U.S. Treasury yield currently sits at some of its highest levels dating back to 2011. Today, investors can lock in yields on a 10-year U.S. Treasury at a current rate we believe is an attractive yield for the more stable portion of a portfolio. Although the threat that rates may climb higher over the intermediate term remains a risk to bond prices, high-quality investment grade and government bonds can help reduce volatility in other areas of the portfolio (such as equities) while also helping focus on an income theme.

5. Consider alternative strategies

Sometimes a little flexibility can go a long way in helping a portfolio manage a downturn. Trusting good managers to make intelligent choices about allocating across assets, sectors, regions, and investment types allows a portion of your portfolio to be more responsive and dynamic in a volatile/uncertain environment. Alternative strategies that have responded well to a rapidly changing environment this year include systematic trend funds (e.g., price momentum strategies), equity market neutral funds, multistrategy funds, and nontraditional bond funds. The common thread across these strategies focuses on the manager's ability to respond more dynamically to shifting macro/micro trends driving asset prices over a shorter window of time. As such, these strategies tend to have more latitude in the size of their responses, which can help their fund quickly mitigate declines and/or take advantage of brief opportunities. We believe investors should consider utilizing these strategies in their portfolio, particularly when market volatility is high or economic conditions are deteriorating.

6. Stay disciplined, opportunistically use downdrafts to your advantage, dollar-cost average, and don't lose sight of your big-picture investment goals

The market will eventually start to price in a day where the Fed is slowing rate hikes, sticker components of inflation are declining, and economic/profit growth is on a more stable and upward-sloping trajectory. In our view, it's critical not to be capsized when the tide suddenly shifts and the boat moves in a new direction, which can quickly place investors on the wrong side of the ship if they're too defensive. The strategies described above should help investors avoid this scenario and be in a solid position to participate when the shift occurs. This can allow time for investors to modestly readjust their positioning back to a more neutral or opportunistic stance if appropriate. 

Market Volatility Resources

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Bottom line

Markets could remain volatile as long as growth is slowing/normalizing and interest rates are attempting to find a higher equilibrium level. In our view, there is an elevated risk that economic conditions could remain challenged over the next few quarters depending on the direction of a host of variables that remain very uncertain currently. 

Yet, we believe assets have priced in some of the pain from higher rates and slower growth, given stock prices attempt to discount the future. As such, we believe investors should avoid becoming too defensive or skewing their portfolio materially away from longer-term asset allocation targets — which are designed to weather multiple market/economic cycles.


Have questions about the above portfolio strategies?

Your Ameriprise financial advisor will answer any questions you may have and can provide personalized recommendations to incorporate some or all the strategies described above. They have the tools and resources to help you employ a dollar-cost-averaging strategy and find ways to use economic/market downturns to your advantage (e.g., tax-loss harvesting).

Unless otherwise noted, all data is sourced from FactSet and Bloomberg as of Aug. 30, 2022. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
The views expressed in this material are as of the date published and are subject to change without notice at any time based on market and other factors. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such. This information may contain certain statements that may be deemed forward-looking. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those discussed. There is no guarantee that investment objectives will be achieved or that any particular investment will be profitable.
This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial concerns.
Information provided by third parties is deemed to be reliable but may be derived using methodologies or techniques that are proprietary or specific to the third-party source.
Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.
There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.
Alternative investments cover a broad range of strategies and structures designed to be low or non-correlated to traditional equity and fixed-income markets with a long-term expectation of illiquidity. Alternative investments involve substantial risks and may be more volatile than traditional investments, making them more appropriate for investors with an above-average tolerance for risk.
Diversification and Dollar cost averaging do not assure a profit or protect against loss.
A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund’s income and yield. These risks may be heightened for longer maturity and duration securities.
The fund’s investments may not keep pace with inflation, which may result in losses.
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An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
The S&P 500 Index is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value (shares outstanding times share price), and its performance is thought to be representative of the stock market as a whole. The S&P 500 index was created in 1957 although it has been extrapolated backwards to several decades earlier for performance comparison purposes. This index provides a broad snapshot of the overall US equity market.
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