Economic Warning Signs: A Shift to Defensive Stocks
As the economy sends out a distress signal, investors are advised to rebalance their portfolios and focus on defensive stocks. A key indicator, the M2 money supply, has been contracting in real terms since 2022, historically a precursor to recession and a signal for defensive stocks to outperform.
The Money Supply Contraction: A Recession Indicator
Ned Davis Research highlights the importance of monitoring the M2 money supply, a measure of the amount of money circulating in the economy. The firm notes that the contraction in M2 has been a reliable indicator of impending recession and a shift towards defensive stocks. This trend is particularly significant, given the distortion in the money supply since the pandemic.
Central Banks’ Role in Shaping the Economy
The Federal Reserve’s actions have contributed to the fluctuation in the money supply. During the pandemic, the Fed’s balance sheet expansion increased the money supply, but its recent efforts to combat inflation have led to a reduction in excess liquidity. This shift has resulted in a contraction in the M2 money supply, signaling a need for investors to reassess their strategies.
Sector Leadership: A Shift to Defensive Stocks
Historically, defensive stocks have performed better during periods of low M2 growth. With the current contraction in M2, investors should consider allocating their resources to sectors like utilities, consumer staples, and healthcare. The latter two sectors have consistently outperformed when the M2 money supply is below its long-term average.
Expert Insights: A Consensus on the Economy
While some experts, like Steve Hanke, predict a recession by early 2025, citing the M2 contraction as a warning sign, others remain optimistic about the economy’s prospects. According to a Bankrate survey, economists believe the odds of a recession in the next year are only 33%. Despite these differing opinions, investors would do well to heed the warning signs and adjust their portfolios accordingly.
A Time for Caution: Rebalancing Your Portfolio
As the economy navigates uncertain waters, investors must be prepared to adapt. By shifting focus to defensive stocks and monitoring the M2 money supply, investors can position themselves for success in a potentially challenging market environment. It’s time to rebalance your portfolio and prioritize caution over optimism.
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