Many are concerned there could be a U.S. recession in 2023. Rising geopolitical tensions, energy market imbalances, persistently high inflation numbers, and rising interest rates leave many investors and economists concerned as well. While the risk of a recession has risen steadily throughout 2022, and the Federal Reserve rose interest rates to battle the possibility, the good news might be that up until this point the U.S. economy has remained relatively stable. And if worse comes to worst, these are the top two risk factors to look for and ways to prepare for the potential of a 2023 recession.
The number one risk factor we have already seen in 2022 is inflation. In June 2022 the consumer price index gained 9.1% year over year, which was the highest inflation rate in more than 40 years. Currently, the Fed is taking an aggressive approach and raising interest rates, as high as the current rates of 3.75% and 4%. Raising interest rates, however, happens to be the second largest risk factor as higher interest rates mean an increase in borrowing money which means businesses will likely stop expanding or creating debt.
While the idea of a recession is still debatable, as inflation and rising interest rates have yet to fully drag down the economy, investors should continue to monitor the labor market as interest rates rise. According to U.S. News, “Bank of America chief economist Michael Gapen says two more 0.5-percentage-point interest rate hikes in December and February followed by an additional 0.25-percentage-point rate hike in March will likely tip the U.S. economy into a recession.” Though Gapen expects conditions to improve enough for the Fed to cut interest rates by December 2023, meaning that the country could be headed to a mini-recession.
If you are investing or looking to get into starting a portfolio, the best option might be to consider reducing exposure to volatile stocks and increasing cash holdings. And then look into an online savings account as interest rates can be as high as 3% right now, with those only expected to rise as the Fed issues more rate hikes. In addition, it may pay to look into value stocks, as those tend to do well in times of elevated interest rates – as well as utility stocks, health care stocks, and consumer staples stocks. It might also pay to ready your portfolio for December 2023, when it is predicted we may come out of recession conditions.
