What Does a Recession Mean for Traders?

What Does a Recession Mean for Traders?

The Chair of the Federal Reserve, Jerome Powell, spoke today at the AGM of the National Association for Business Economics. Unfortunately, he did not have much good news to share. He advised that the Feds “view the economy as being strong but susceptible to shocks, particularly from a global slowdown, trade and geopolitics like a potentially messy Brexit.”

The market did not like that attitude one bit and SPY (the ETF that generally shows market direction) sold off about 1.5%. According to the technical charts, SPY may very well sell off even more toward its 200 simple moving average on its daily chart (as seen in the figure below):

SPY daily chart for the last 2 months.

The question in all of this is: where is the big money going? Imagine you are a hedge fund manager that has $500 million in assets under management, and you are required to produce an annual return of 5-10%. Where do you keep your money? Let’s take a look at the various sectors and see, in this time of economic doubt, which sector is up.

Over the last 3-month and 6-month periods, the Utilities sector has been up. As you can see in the above figure, they’ve been up 2% in the last month alone. But why?

In times of economic downturn, or during times when the hedge funds and Wall Street are uncertain, the big money will flow to safe havens. The utilities that provide basic amenities such as water, sewage services, electricity, dams, and natural gas are considered high yield sectors because people need them, no matter whether it’s during a recession or when the economy is growing. Since utilities are part of the public service landscape, they are heavily regulated and almost always a stable business to invest in. Investors typically treat utilities as long-term holdings and use them to inject steady income into their portfolios, especially during times of market uncertainty. Imagine this, if I am unemployed I may not buy anything on Instagram or Snapchat, but I will definitely pay my water, electricity and cell phone bills. The moral of this story is simple: keep an eye on where the big money is flowing.

What does all of this mean to us traders?

This is the best of times for us. Swing traders can benefit from these large short-term swings and day traders who are more educated and more skilled can capitalize even more on these uncertainties. For example, TVIX was up almost 14% today! These are great times to be a trader!