Sometimes everyday life can tell you more about the economy than experts at the Federal Reserve or the Bureau of Labor Statistics. Home contractors stop getting calls, hairdressers have more open appointments in their books, and even dentist offices slow down.
To Jared Dillian, author of The Daily Dirtnap, signs that the economy is slowing down are all around. In fact, he believes a recession is imminent.
Most people can generally agree on the timeline of how we got here. In response to Covid-19, the Fed helped flood the market with liquidity. New retail investors entered the market thanks to stimulus checks and extra time at home. Equities shot higher, meme coins exploded, and grandmas started learning about Bitcoin (BTC-USD). Major indices hit their last high mark in January 2022.
Then, things changed. As stocks were creeping higher, so too was inflation. Various readings showed increases in prices not seen since 1981, with everything from eggs to gas getting much more expensive. The Fed had to reverse course, enacting a rate-hiking cycle that has taken its benchmark rate to 5.5%.
In carrying out its rate hikes, the Fed succeeded in cooling off the stock market. Investors have gone nearly two years without another new high, and Bitcoin is trading near $29,000. Only the most die-hard fans still support names like GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC).
What not everyone agrees on is the path forward from here.
Dillian, a former Lehman Brothers trader turned daily newsletter writer, finds a calling in giving investors good, rational market advice. And now, that advice is to brace for impact… or at least a coming recession.
“I collect a lot of anecdotal information from my subscribers and from people I talk to,” Dillian told InvestorPlace. I’m seeing a lot of signs of slowing that haven’t shown up in the data yet, that haven’t shown up in the Beige Book.”
And the numbers that have shown up also contain warnings. An initial read of June’s payrolls report showed the economy adding 209,000 jobs. Later, that number was revised down to roughly 100,000. Student loan payments have resumed, threatening consumer spending. Supply chain problems that emerged in the early days of the pandemic have also reversed, leaving some retailers reeling with too much inventory.
“Throughout the pandemic, we had a period of over-investment and mal-investment and money going places it shouldn’t,” Dillian said. “… A lot of people have been saying, ‘Where’s the recession?’ That’s a fair question to ask. But I think we pumped $3 trillion into the economy during the pandemic and it’s still sloshing around. I think that has prevented the recession from happening on time. There’s been a long delay, but it is going to happen.”
What happens once it does? Dillian forecasts a mild to moderate recession, far less severe than 2008. However, he sees the bad news for investors getting worse.
At the same time that Dillian and others call for a recession, some market commentators have declared we are in a new bull market. This optimism largely stems from artificial intelligence, with related companies like Nvidia (NASDAQ:NVDA) surging in 2023. NVDA alone is up 205% this year.
But Dillian thinks on the whole, the stock market is just getting comfortable in a 10-year slump, one he traces back to the last new highs in January 2022. He points to historical examples where the market fell flat for 10 or more years at a time. Most recently, we experienced a decade of zero returns from 2000 to 2011.
For investors, this means the path forward will be tough. Dillian also sees it as a call to diversify and learn how to invest the “right way” — so no more calls on GameStop.
“Really, it is tough psychologically to keep investing and shoving money into the market when over the course of three, five, seven years you still haven’t made higher highs,” Dillian said. “After 10 years or however long, that will end. We’ll get another bull market and people will be totally under-invested.”
To avoid this doom loop, Dillian is giving his subscribers some key recommendations. Diversify your portfolio, focus less on stocks (Dillian doesn’t own a single one), and look to asset classes that can outperform when the market stagnates.
Specifically, he encourages investors to have a mix of bonds, commodities, gold, real estate and cash. If gold retakes its previous highs of $2,060 per ounce, he teases that it could run as high as $3,000. That’s part of the reason Dillian believes gold should be 20% of your portfolio.
“Gold has certain properties as a diversifier that are not exhibited by any other asset classes. It’s very uncorrelated to anything else,” Dillian said. “When you add gold to a portfolio, you reduce the portfolio risk, which reduces the volatility. That’s the reason to own it.”
So what about stocks? Is there room for the names investors know and love over the next eight or so years? Dillian isn’t so sure. “I [don’t] see a lot of opportunity in the [stock] market.”
If you insist on buying up shares here or there, he has an extra warning against economically cyclical names and the Magnificent Seven. These companies, like Meta Platforms (NASDAQ:META) and Apple (NASDAQ:AAPL), have outperformed in 2023. Heading into a recession later in 2023 and beyond, Dillian said that trend is likely to reverse.
With a potential 10-year slog ahead of us until the stock market comes roaring back, Dillian believes investors can keep their heads up and find opportunities in gold and other different asset classes. And for those still recovering from r/WallStreetBets losses, he says to pick up a book and start learning.
“When I started to learn how to invest, it was 1998 and I was buying stocks like Philip Morris and Texaco. I built a portfolio and I did it the right way. That’s what people need to do [now].”
On the date of publication, the InvestorPlace staff member responsible for this article did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
