There's been no shortage of recession forecasts over the last year as prognosticators, Wall Street banks, and top CEOs have all said the economy is headed for a downturn.
Now you can add another big name to that list. Earlier in April, the minutes from the Federal Reserve's last meeting revealed that Fed economists now expect a mild recession to come in the second half of the year, triggered by the banking crisis that came in March.
That news alone hasn't shaken the market. After all, stocks have been in a bear market for nearly a year and a half now. But it underscores the fact that the economy could continue to get worse before it gets better.
First-quarter GDP was also slower than expected, coming in at an annualized rate of 1.1% against a 2% estimate, showing the economy could be slipping into a recession.
While you can't control whether there's a recession or not, you can control what you do about it. Here are a few things investors may want to do to prepare for a downturn.
Check your emergency fund
Before you worry about your portfolio, the first thing you should do is check your emergency fund.
Recessions almost always come with rising unemployment rates, meaning real people lose their jobs. We've already seen plenty of layoffs in the tech and entertainment industries, and more layoffs are likely to come if the economy falls into a recession.
Most financial experts recommend having an emergency fund of three to six months of monthly expenses. Now is a good time to make sure you have a safety net in case you're affected by a job loss.
Remember your time horizon
How a recession impacts you as an investor depends on your time horizon. While it never feels good to see your stock holdings fall, a sell-off is actually good for a net buyer of stocks because it makes them cheaper.
If you're a younger investor with a long time horizon, a recession could be a good buying opportunity, especially if you have money to spend. Now is a good time to make a watch list of stocks you'd like to buy if they go on sale.
Alternatively, if you're a retiree or somebody counting on money from your stock portfolio now, you may want to reallocate some of your holdings to safer stocks, dividend payers, or even bonds, which are more attractive these days thanks to the Fed's steady interest rate hikes over the last year.
Don't panic
Alternatively, there's no need to do anything to prepare your portfolio for a recession. Considering the S&P 500 is still down nearly 15% from its peak in early 2022, the market still seems to have priced in a recession.
And we don't even know for sure that one is going to happen. The banking industry appears to be working through its latest crisis, and most of the big tech companies that have reported first-quarter earnings have posted accelerating revenue growth from the fourth quarter, showing that the worst of the tech recession could be behind us.
Since timing the market is basically impossible, it's a waste of time trying to do it. If you're looking to buy stocks, you're better off buying high-quality companies trading at reasonable prices.
Don't sell all your holdings
Finally, another thing to avoid if you're wary of a recession is selling all of your stocks. That may seem like a smart move since stocks are likely to fall in a recession, but there are two problems with this line of thinking.
First, you could be wrong. We don't know yet that a recession is coming, and we don't know where stocks are headed. Once again, timing the market is a fool's errand.
Even if you're right, you'll face a bigger dilemma. You won't know when to get back into the market and you could miss out on the recovery, which would be much worse than never selling in the first place.
Remember that stocks fall faster than they rise, but bull markets tend to last much longer than bear markets, meaning stocks go up further over the long run. That's as good of a reason as any to hold through a recession and be a long-term investor.
