The banks are crying uncle. But Uncle Sam isn’t listening.
It’s been a month since the banking crisis began with the implosion of Silicon Valley Bank and the shutdown of Signature Bank.
Thankfully, the panic has subsided and it doesn’t seem like a bank run is going to take down any other financial institutions in the near future.
But banks aren’t out of the woods yet. They’re still sitting on hundreds of billions of underwater bonds. It will take years for those to roll off the books. Or interest rates have to come back down for those bonds to recover in value.
The thing is, the Fed isn’t in any hurry to bring rates back down. They really want to make sure inflation comes down to their target of 2%.
Most people think the Fed will hike rates by another 25 basis points at their next meeting in May. That will continue to put the squeeze on banks.
And the developing “credit crunch” will push the economy closer to recession…
Here at the Intelligent Income Daily, we’re focused on finding the safest income investments on the market so you can rest assured your wealth is secure and growing for years to come. And while a coming recession sounds scary, we’re here to guide you through these volatile events and prepare for you for what’s next.
Today I want to explain why banks are pulling back on lending and what that means for the economy. I’ll also give you three ways to prepare your portfolio for a possible recession.
Banks Are Losing Their Deposits to the Money Market
A couple months ago I told you several ways to make your cash work harder for you.
It looks like many have already started to follow that advice.
The banking crisis was a wakeup call for a lot of folks. While trying to figure out if their money was safe, people realized that they’re earning next to nothing on the cash sitting in their savings accounts.
Right now, the national average savings account interest rate is 0.37% according to the FDIC.
That’s unacceptable when the Fed is handing out short-term Treasuries that yield 4.75%.
So while people aren’t yanking their money out of banks in a panic, they are moving it to places where they can get a better return.
Money is flowing out of bank deposits and into money market funds. The collapse of Silicon Valley Bank accelerated this trend.
That’s a problem for banks because they use the money from their deposits to make loans. With money leaving, banks have to be a lot more selective about the loans they make – this is what’s known as a credit crunch.
They’ll require higher credit quality from applicants and charge higher interest rates to make sure the loans stay profitable.
A credit crunch like this can disproportionately affect small businesses, which can’t issue corporate bonds and rely on personal savings or bank loans to keep the lights on.
That has knock-on effects for the broader economy. According to the Small Business Administration Office of Advocacy, small businesses employ 46% of all private sector workers.
With bank loans becoming too expensive or unavailable, small businesses will have to make some tough decisions that could impact jobs for many people.
And as people reduce their spending, the economy slips closer to recession.
So What Should You Do?
The good news is, we can see this coming. It’s not too late to change your investing plan, so that whichever way the economy turns, your portfolio stays protected. Here are three ways you can prepare your portfolio for a potential downturn.
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Have a cash buffer. At the very least you want to make sure you have enough to meet day-to-day expenses without being forced to sell stocks in a bear market. It’s even better if you have a bit extra that you can save to invest when stocks are cheap. And of course, keep your cash where it earns a decent yield.
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Don’t speculate on unproven and cyclical businesses. After the pandemic we saw lots of people gambling on SPACs and meme stocks like Gamestop. Most of those ended up as big losers because they were unprofitable businesses. Now’s not the time to be throwing your money away.
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Build a reliable income stream. Companies in defensive sectors like consumer staples, healthcare, and utilities provide goods and services that are needed by everybody. Many of these pay safe, reliable dividends that grow every year.
A quick way to add these to your portfolio is through the Health Care Select Sector SPDR Fund ETF (XLV).
This ETF invests in reliable healthcare companies which have steady income even during recessions. And many of its top holdings have long dividend growth streaks.
It yields 1.5% and over the past year has outperformed the S&P 500 by 2.8%.
At Wide Moat Research, our mission is to protect your principal at ALL costs so that your finances do not keep you up at night. Now is the time to prepare.
And we have even more reliable dividend ideas in our Intelligent Income Investor service. We seek out the best dividend growth ideas and select companies with long-lasting competitive advantages (wide moats) that pay dividends come bull market or bear. To find out more and receive a free pick, click here.
Don’t leave your portfolio vulnerable to the upcoming recession.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily