A deep recession might not happen in 2023. While the current equity and bond markets seem unpredictable, there are telling trends on where opportunity will come in the next half of the year.
According to Anthony Chan, former JPMorgan Chief Economist, the Feds will raise interest rates to induce a recession. Chan bluntly stated in a recent Fox News interview that we will go into a recession in the later part of 2023 or into 2024. Here is a link to the full interview. So, if a recession is looming, where is the opportunity?
Monthly View-There is an apparent opportunity in bonds going into the second half of 2023. The Fed Funds rate is the highest it’s been in recent years. Since bonds are inversely affected by the Fed Funds rate, we are seeing an uptick in bond prices, anticipating a recession which will result in a decrease in rates. Below is an example of the monthly volatility in an iShares US Aggregate Bond Index Institutional Fund (Ticker: BMOIX). For short-term investors in need of immediate cash, longer term bonds are still not ideal. As you read in my last article, that’s what got Silicon Valley Bank in trouble. However, for those constructing conservative or moderate risk core portfolios with equities and fixed income, the following charts will display what bonds have to offer going into a recession. (Figure one).
Quarterly View – Figure two chart illustrates the quarterly Fed Rates and bond returns from 2019 up until March of 2023. As illustrated, in 2019, when interest rates were between 2 and 3 percent, quarterly bond returns were stable. However, during the Covid 2020 recession, as interest rates were driven downward, bond prices spiked. In 2021, investors holding bonds experienced some volatility. However, as interest rates started to spike in 2022, bond prices spiraled downward. Conversely, the last half of 2022 shows a recovering bond market. As interest rates move downward during a recession, bonds should perform well.
Annual View – To get a clearer picture, figure three is an annual Fed Rate Vs bond trend which illustrates that as interest rates were abruptly hiked in 2022, bond prices nosedived. However, going into 2023 bonds are offering what they are designed for-a haven investment during a recession, and experienced investors are prepared.
Allocation – For those with short term needs, cash is where you want to be. We are offering interest rates on basic savings accounts between three and five percent. For intermediate and long-term investing, it is important to have a diversified portfolio, taking advantage of the current market downturn in equities and bonds. For a time-horizon of two to five years, consider a 60 percent equity and 40 percent bond approach. 
For investors interested in long term growth, overweight equities and consider alternative investments to hedge risk in core portfolios. Though markets seem unpredictable, there is plenty of opportunity. Reach out to me if you would like to talk about how we can help you win during these seemingly uncertain times.
If you already have an investment advisor congratulations. However, if you’d like to learn more about what investment advisors do for their clients, don’t hesitate to contact me or at empiriKalpartners.com for an individual assessment.
Edward Vela is the Director of Financial Planning, an Investment Advisor, and Estate Planning Specialist at empiriKal partners, llc ©, with 15 years of wealth management experience. He earned a Journalism Certification from the University of Massachusetts, a BA in Political Science, a Financial Planning Certification at UCLA, and an MBA from the UCLA Anderson School of Management specializing in entrepreneurship and finance. You can contact Edward at 925-300-8805 or email edward@empiriKalpartners.com.
