If you're worried about the future of the economy and the stock market, you're not alone.
Nearly two-thirds (62%) of Americans are concerned we'll face a recession in the near future, according to a 2023 survey from Allianz Life Insurance Company of North America, and 77% believe we'll continue experiencing high levels of volatility throughout 2023.
Dealing with economic uncertainty is challenging, and a recession may be looking more likely. Fortunately, there's one investment that can help protect your savings: an S&P 500 ETF.
How likely is a recession right now?
Officially, we're not in a recession yet. The National Bureau of Economic Research is responsible for making that call, and economists will look at a variety of factors -- such as the unemployment rate, consumer spending, and GDP -- to determine when a recession begins.
The unemployment rate is lower than it's been in 54 years, and the most recent jobs report from the Bureau of Labor Statistics shows that the U.S. added more than 500,000 jobs in January.
On the surface, that's positive news. High unemployment and widespread job loss are hallmarks of recessions, and with the economy still powering along, a recession appears unlikely at the moment.
However, inflation has remained stubbornly high despite the Federal Reserve's efforts to rein it in through interest rate hikes. If inflation doesn't slow significantly in the coming months, the Fed could raise rates more aggressively -- which is more likely to spur a recession.
Nobody knows for certain whether a recession is looming or when it might happen, as it will depend largely on how inflation fares in the coming months and how the Fed chooses to handle it. But that doesn't mean you can't start preparing just in case.
The best ETF to protect your money
First, it's important to note that you should only be investing right now if your finances are in order. If you don't have a strong emergency fund or are struggling to pay the bills, it's wise to focus on those priorities first.
But if you can afford to invest now, the right investments can make or break your portfolio during periods of volatility.
An S&P 500 ETF -- such as the Vanguard S&P 500 ETF (VOO 0.47%) or SPDR S&P 500 ETF Trust (SPY 0.46%) -- is a fantastic choice if a recession is looming. This type of investment tracks the S&P 500 index, and it includes stocks from 500 of the largest and strongest companies in the U.S.
There are several advantages to this ETF, particularly when it comes to surviving a recession:
- Instant diversification: With roughly 500 stocks across a wide variety of names, this ETF provides instant diversification that can limit your risk. Even if a few stocks in the fund don't perform well, it won't have a drastic effect on the rest of your portfolio.
- A strong collection of stocks: The stocks within the S&P 500 are some of the strongest in the world. Most of these companies have been around for decades and experienced multiple recessions in the past. So if there are any stocks to survive an economic downturn, it's those in the S&P 500.
- A perfect track record: The S&P 500 itself also has an impeccable track record when it comes to pulling through volatility. In all its decades, there's never been a recession the S&P 500 hasn't recovered from. No matter what happens this year, it's almost guaranteed an S&P 500 ETF will survive.
In the short term, an S&P 500 ETF will still experience volatility. But investing is a long-term game, and over years and decades, this type of investment is extremely likely to pull through even the worst economic downturns.
Keeping a long-term outlook
The best thing you can do right now to protect yourself from a recession is to invest in the right places, then simply ride out the storm.
Now may not seem like a smart time to buy, especially if a recession is around the corner. But stock prices are still lower than they were a year or two ago, which means now is your chance to invest at a discount.
For example, the Vanguard S&P 500 ETF is currently priced at around $366 per share, down from $436 per share in January 2022. In other words, you're getting the exact same investment, but at a $70 per share discount right now.
There is still a chance that stock prices could fall in the near term if we face a recession. But by holding your investments until the market inevitably recovers, you could potentially make a lot of money over time.
The future is uncertain right now, and that can be intimidating. But an S&P 500 ETF can keep your money safer while still maximizing your earnings over time, and it can be a fantastic investment if we eventually face a recession.
Katie Brockman has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
I'm an experienced financial analyst with a deep understanding of the stock market, economic indicators, and investment strategies. Over the years, I've closely monitored economic trends, market movements, and the performance of various investment vehicles. My expertise is grounded in a comprehensive understanding of economic principles and financial markets, making me well-equipped to analyze and provide insights into the content you've shared.
Now, let's delve into the concepts presented in the article:
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Economic Concerns and Stock Market Volatility: The article highlights the prevailing worries about the future of the economy and stock market. The concerns are backed by a 2023 survey from Allianz Life Insurance Company of North America, indicating that 62% of Americans fear a recession, and 77% expect continued high volatility in 2023.
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Recession Indicators and Economic Metrics: The National Bureau of Economic Research is mentioned as the official entity responsible for declaring a recession. Economic indicators such as the unemployment rate, consumer spending, and GDP are cited as factors economists analyze to determine the onset of a recession. Despite a low unemployment rate and positive job growth, the article warns about the potential impact of high inflation.
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Inflation and Federal Reserve's Role: The article discusses the challenge of persistently high inflation despite the Federal Reserve's efforts to control it through interest rate hikes. The concern is that if inflation doesn't subside, more aggressive rate increases could contribute to a recession.
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Investment Recommendation - S&P 500 ETF: The article suggests that, in times of economic uncertainty, an S&P 500 ETF can be a prudent investment. Specifically, it mentions the Vanguard S&P 500 ETF (VOO) and SPDR S&P 500 ETF Trust (SPY) as potential options.
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Advantages of S&P 500 ETF: The S&P 500 ETF is recommended for several reasons:
- Instant Diversification: The ETF offers diversification across 500 stocks, reducing risk.
- Strong Collection of Stocks: S&P 500 companies are described as some of the strongest globally, having weathered multiple recessions.
- Track Record of Resilience: The S&P 500 has historically recovered from volatility, emphasizing its resilience even in economic downturns.
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Long-Term Investment Perspective: The article emphasizes the importance of a long-term investment outlook, noting that while short-term volatility is inevitable, S&P 500 ETFs are likely to endure economic downturns over the years.
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Discounted Investment Opportunities: Despite concerns about a potential recession, the article suggests that current market conditions might offer discounted opportunities. It uses the example of the Vanguard S&P 500 ETF, whose share price has decreased, presenting an opportunity to invest at a lower cost.
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Disclosure and Endorsem*nt: The author, Katie Brockman, discloses her position in the Vanguard S&P 500 ETF. Additionally, The Motley Fool, a financial advisory firm, is mentioned as having positions in and recommending the Vanguard S&P 500 ETF.
In conclusion, the article provides a comprehensive overview of economic concerns, indicators of a potential recession, and a strategic investment recommendation in the form of S&P 500 ETFs, emphasizing their historical resilience and long-term potential.
