4 ETFs to own and 3 signals for a dip

  • A recession is rushing towards the American economy, warns Bank of America.
  • The only major yardstick to confirm this is a Fed pivot, according to the story.
  • In a downturn, the bank likes ETFs like IYK, ANGL, FALN, and CALF.

Bank of America economists expect a recession to hit the US economy this year.

In a note to clients on Tuesday, the bank’s research investment committee said two of the three main recession signals were already showing warning signs: banks’ lending standards are tightening and the yield curve is steepening. steepens, meaning the abnormal spread between the short and long-term bond yields end. A dovish Federal Reserve pivot to looser monetary policy is the only test left.

lending standards, recession

Bank of America

This is bad news for stock market investors, as a recession likely means downward pressure on corporate earnings and stock prices. Savita Subramanian, the bank’s top U.S. equity strategist, said the S&P 500 could drop as low as 3,000 during a recession, down more than 26% from current index levels around 4. 100.

But being in the right areas of the market and timing the downturn correctly can mean the difference between losing significant value in a portfolio and effectively protecting capital.

In the memo, a team of strategists led by Jared Woodard laid out a plan to make it happen. They studied the 30 periods of recession and the 15 previous bear markets over the last 150 years and identified which were the safest sectors and themes to invest money in during a downturn, and how to time the hollow.

Where to invest in a downturn

According to Bank of America’s US Plan Indicator, the investment environment has just entered a period of “downturn”.

bofa us rev indicator

Bank of America

When the indicator has entered this phase in the past, strategists have said that defensive stocks, small cap stocks, value stocks and emerging market stocks have outperformed. They also said they liked corporate bonds and gold in this environment.

They’ve listed the specific ETFs they like to gain exposure to these market segments: the iShares US Consumer Staples ETF (IYK); THE VanEck Fallen Angel High Yield Bond ETF (ANGL); THE iShares Fallen Angels USD Bond ETF (FALN); and the Pacer US Small Cap Cash Cows 100 ETF (CALF).

Meanwhile, Woodard and his team suggested shorting tech stocks, specifically the Nasdaq 100 Technology Index Fund (QTEC).

“The technology remains too expensive, too concentrated and has only outperformed during two downturn regimes: the dotcom bubble and Covid,” they said.

They also recommended “taking profits” when lending standards tighten (which is happening now) and entering cash when the Fed cuts.

How to identify a market bottom – and where to invest when it happens

Based on the century and a half of history studied by Woodard and his team, three criteria have generally been met, meaning the bear market has bottomed out. In order, they include: earnings bottoming out; the S&P 500 exceeds its 200-day (or 10-month) moving average; and the peak unemployment rate.

Strategists recommended gradually putting money back into the market after each of the above criteria has occurred, instead of trying to bet on a market bottom at some point.

bear market bottom

Bank of America

unemployment rate as a lower indicator

Bank of America

Being late rather than ahead when planning for a market bottom doesn’t mean a huge difference in lost returns, they said.

“Investor confidence should rise as these indicators start signaling a recovery. Waiting four months after a market bottom typically means giving up about 15% of the initial rally,” they said. “This is a relatively small price to pay for increased confidence in positioning for average returns >300% to the next market peak.”

But they stressed it’s not too late and said to “buy with confidence” when the bottom three criteria are met.

“NBER recession determinations can take anywhere from 4 to 21 months after the recession officially ends. The NBER announced in July 2021 that the 2020 recession ended on April 20. An investor who waited for confirmation official would have missed 80% of the post-Covid Gathering,” they said.

In addition to the broader index, they also said materials stocks should outperform as the market begins to recover. Specifically, they like the AlphaDEX First Trust Materials Fund (FXZ).

Small-cap corporate bond and value ETFs that strategists favor for the downturn should also continue to perform well during the recovery phase, they said.

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