Is recession in the cards?

Sep 9th, 2019 | By | Category: Equities

By Salvatore J. Bruno, Chief Investment Officer, IndexIQ.

Salvatore Bruno, Chief Investment Officer at IndexIQ

Salvatore Bruno, Chief Investment Officer at IndexIQ.

There’s a saying that recessions don’t just happen; they’re the result of policy mistakes. There are differing opinions about the policy steps currently being taken with respect to trade and the Fed’s actions. This is causing market volatility and has economists worried, and more and more are predicting the possibility of recession between now and the end of 2020.

Still, nothing is inevitable. In the US, the economic data has been mixed. Manufacturing is weak here, as it has been around the globe, but consumer spending and wage growth have been strong. Central banks around the world have been moving to cut rates.

Zooming out from the day to day tweets and headlines, trade talks with China are still largely grinding forward and, with the election looming next year, the Trump Administration has every reason to try to find a resolution. All this may allow the economy to continue to expand, albeit at a slower rate.

Still, there are plenty of cross-currents. International investors have seen their returns negatively impacted by the apparently relentless climb of the dollar. Income investors are seeing the rate of return on their bonds decline as the Fed cuts rates and fixed income yields decline.


IQ 50 Percent Hedged FTSE International ETF

– Tracks the FTSE Developed ex North America 50%
Hedged to USD Index, providing exposure to
international developed stocks while hedging half
the foreign currency exposure relative to USD.

– Houses $200m AUM and comes with an expense
ratio of 0.20%.

IQ S&P High Yield Low Volatility Bond ETF

– Tracks the S&P US High Yield Low Volatility
Corporate Bond Index, providing exposure to
selected USD high yield corporate bonds that
contribute a low amount of risk to the broader
high yield bond universe.

– Houses $65m AUM and comes with an expense
ratio of 0.40%.

As all of this unfolds, time-tested factor-based and liquid alternative strategies can help address some of these challenges.

In bonds, a momentum-driven approach may help identify the fixed income instruments most likely to outperform in these circumstances and weight the portfolio holdings accordingly.

In international equities, a 50% hedged position, such as IQ 50 Percent Hedged FTSE International ETF (HFXI US), can help soften the dramatic, often unpredictable, moves in currencies as central banks cut rates.

For the broad market, liquid alternatives can help manage volatility and add non-correlated assets to an equity portfolio. Low volatility strategies are another option – the IQ S&P High Yield Low Volatility Bond ETF (HYLV US) is one ETF of note that pursues this strategy, while also seeking to provide income.

None of these are guaranteed protection against a market downturn sparked by a recession, if and when one comes. And the nature of the recession matters, too. But whatever else the future holds, the current expansion is getting on in age and is, by some measures, the longest in modern history. This suggests that we’re likely closer to the end than to the beginning. That being the case, it may be time to consider positioning your portfolio more defensively in anticipation of slowing growth.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

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