Investing During Times Of Uncertainty

Steven Spielberg

Founder and CEO of FarmTogether

At the end of 2019, the Dow Jones sat at 28,538 points, and life was very different than it is today. Fast forward almost two years, the Dow Jones sits almost 6,000 points higher than its 2019 high, as of this writing. In 2021, the S&P 500 hit a record high 54 times through early September — the most over the same span of time since 1995. 

Despite this remarkable rally, there’s been a number of large, looming headlines stirring uncertainty in the financial markets.

The Current State Of Precariousness

There are several macroeconomic factors impacting today’s market uncertainty. It’s appearing more likely that China will not bail out major real estate developer Evergrande, though it’s not clear what the potential economic fallout of its looming bankruptcy will be. Many feel the United States will be shielded from any fallout, while others note heavy fund outflows from BlackRock and Fidelity.

Domestically, things are also uncertain. The Federal Reserve is still signaling it will continue holding overnight lending rates near 0% in the near future — though rates will surely increase eventually. There’s no clear direction on when the Federal Reserve will begin tapering the $80 billion of Treasury securities and $40 billion of mortgage-backed securities purchased each month. Last, you can’t forget about price increases. Recent comments by Fed Chairman Jerome Powell indicate inflation might last longer than expected.

Traditional Opportunities During Uncertainty

So where does this leave investors — where might they find opportunities during uncertainty? Starting with equities, both health care and consumer staples — sectors that necessitate spending regardless of economic conditions — typically perform well during uncertainty. During the 2020 financial crash, the S&P 500 had a year-to-date loss of 11.2% by early May. Over the same period, the consumer staples category was only down 8.6% and health care was down only 2.1%. While small cap stocks generally rule when recessions end, they are historically hit hard during economic downturns.

Fixed income investments have also been popular during recessions. Yet, on the equity side, there’s recent history that proves this isn’t ideal, at least if investors are most interested in dividend yields. As companies look to shed risk and preserve cash, cuts or eliminations to dividends are common. In 2020, year-over-year dividends dropped $42.5 billion in the second quarter, the largest annual decline since Q1 2009. As for bonds, most major bond indexes performed well compared to the S&P 500 during the 2008 financial crisis. From early 2008 to mid-2009, the Bloomberg Barclays Corporate Bond, Treasury Bond, U.S. Aggregate and Municipal Bond indices all posted positive returns. Over the same period, the S&P 500’s return was -36.49%. However, keep in mind that in response to the Covid-19 recession, the bond market is having a historically poor year in 2021.

Alternative Opportunities During Uncertainty

Alternative investments have proven to be an interesting diversification hedge in recessions. With its short existence, cryptocurrency hasn’t experienced a “normal” economic recession. However, bitcoin is naturally diversified — it represents wealth across all borders and is not tied to any one country’s economy. While the United States, European Union and Japan experienced economic downturns from 2007 to 2009, many developing nations — including those potentially most reliant on cryptocurrency — economically expanded during this time.

Additionally, research shows certain investments in crops, metals and other tangible goods are inversely related with traditional investments. At the end of December 2007, silver stood at $14.76 per ounce. Though the price fluctuated during the next several years, the price of silver landed at $13.94 per ounce at the end of the Great Recession. Precious metals have also proven to be solid investments coming out of economic downturns. For example, between September 2010 and September 2011, gold prices jumped 50.6%. However, it’s important to keep in mind that not all physical goods perform well during recessions, as the price of a barrel of crude oil dropped from $133.88 to $39.09 in 2008.

Farmland, a newly accessible asset class, has historically had a strong negative correlation to equities and bonds, continues to experience valuation increases throughout the past year and benefits from increased food demand and rising food prices during economic uncertainty. From 1995 through 2019, U.S. farmland had annualized returns of 11.51% with a 7.08% standard deviation. When looked at on a granular level, farmland performed notably strong during previous market downturns; the asset returned an average annual return of 5.3% during the dotcom recession of 2000-2002, 15.8% during the 2008 Great Recession and 6.7% during the economic slowdown in 2018.

Although uncertainty abounds domestically and globally, opportunity also abounds for investors — through both traditional and alternative options.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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