Key Takeaways
- White House officials and lawmakers have reached a deal in principle to raise the U.S. debt ceiling and avoid default
- The deal, which still has to pass in Congress, raises the debt ceiling and introduces spending cuts
- Coming this close to the brink of a US default may have lingering economic consequences
- It’s a good time to reevaluate your portfolio to minimize risk
This weekend saw an agreement between The White House and Congress to raise the US debt ceiling and avoid what experts forecasted as certain economic catastrophe resulting in higher borrowing costs, plummeting stocks, and a huge blow to US credibility.
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The details of the deal have yet to be ironed out, but so far, cuts include a cap on non-defense spending, cuts to IRS funding, and the restart of student loan repayments.
While the deal negotiations continue to unfold, economic concerns that took a backseat during the default frenzy are also coming back into focus. At its next meeting in June, the Fed will decide to hike rates again or pause, and, meanwhile, fears over a bank crisis still linger in the background.
All in all, the atmosphere of uncertainty and this close call on the U.S. default have many investors wondering how to shore up their portfolios.
The US government might have swerved a major economic crisis, but that doesn’t mean it’s smooth sailing. It’s a tough economy, and in times like these it pays to invest in stable, value stocks – the favorite strategy of Warren Buffet.
With the Value Vault Kit, you don’t need to Buffet yourself, because you’ve got AI on your side. Every week, our AI predicts which stocks are likely to perform the best for the week ahead, and then automatically adjusts your holdings accordingly.
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How to invest in the face of US uncertainty
Simply put: diversification is the best way to mitigate the risk of any investment portfolio because when one investment goes south, you potentially offset the loss with a better performing stock or asset. Even though returns might sometimes be lower on a diverse portfolio than those of a single high-performing stock, that diversity is a defensive position that tends to pay off long-term.
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The classic example is that typically when stocks fall, bonds rise, so holding a mix of stocks and bonds is advantageous. But diversification goes well beyond stocks and bonds. To maximize this strategy, your best bet is to diversify across companies, industries, sectors, market cap, and asset classes.
A diverse portfolio might include a mix of large- and small-cap domestic stocks, corporate bonds, international stocks, government bonds, real estate, and cash. You can’t avoid risk altogether, and you don’t want to dilute your portfolio, but there are ways to ease into diversification.
For investors unsure of how to start diversifying, index funds offer partial ownership of assets in the index — this includes different companies, holdings, and securities. Index funds mirror a particular financial market index, like the S&P 500, and tend to be lower risk, lower expense, and good for long-term investments.
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Another option is to invest in an exchange traded fund (ETF), which can contain stocks, commodities, and bonds and can be bought and sold on the stock exchange like regular stocks. ETFs have fewer broker commissions and lower expense ratios than individual stocks.
What about going beyond our borders?
Don’t be afraid to look beyond domestic borders for some of that diversification, as stock markets and economies in places like Europe and Asia often move differently. While big global events (like, say, a US default) impact markets worldwide, markets typically don’t rise and fall at the same rate around the world.
Sometimes when one economy faces headwinds, others perform better.
We don’t need to go back particularly far to see evidence of this: International stocks outperformed US stocks in 2022, and that wasn’t a one-off event. Since 1975, US stocks have outperformed international stocks for about an eight-year cycle on average.
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By investing internationally, you increase your chances of benefitting from a market rally overseas. There are also opportunities for growth in emerging markets, but it’s worth noting that emerging markets carry some significant risks not present in developed ones, including foreign tax structures, political instability, and changes in foreign interest rates.
Are any assets “recession-proof”?
There might not be anything that’s totally recession-proof, but there are certainly assets less prone to the effects of a recession. These are not always the highest valued stocks at any given moment and might not get the highest returns, but they show less volatility over time and are part of successful long-term investing strategy. Sometimes the smart thing isn’t the most glamorous, but adding some recession-resistant stocks to a well-balanced portfolio is definitely a smart move.
Johnson & Johnson (JNJ) is an example of a recession-resistant stock. JNJ has a long history of steady performance through economic cycles. The company’s products tend to be inelastic, meaning that demand for them remains relatively stable in a recession.
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Along the same lines, Procter & Gamble Co (PG) is a consumer goods company that makes Tide laundry detergent, Pampers diapers, and Crest toothpaste — more goods that households shop for even in lean times.
In a completely different sector, Duke Energy Corporation (DUK) is worth a look. DUK is a utility company (electricity, gas, and other services). Since these utilities are really essential to keep things running, they tend to remain stable through periods of recession as well.
The bottom line
It looks like the government will pull off a debt deal before we see an unprecedented US default, though we won’t know for sure until Congress votes on Wednesday. Even if the deal passes, the intense political polarization that made it such a close call and the overall economic uncertainty of the current moment are reasons enough to diversify, invest with a global approach, and explore recession-resistant assets.
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Q.ai’s Global Trends Kit is for investors looking at adding global macro assets to their portfolios in a low-risk, diversified way. An AI algorithm finds the stocks and bonds, gold and oil performing well each week by sifting through the data, then weights the holdings as needed to help you build wealth.
Download Q.ai today for access to AI-powered investment strategies.
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