Recession, possible oil price rise again, rate hikes. 2023 is so far bringing only negative influences for investors. How should investors prepare themselves and what should they do?

After the S&P 500 index fell by 19% in 2022, investors are rightly concerned about what this year will bring. Inflation is still high, interest rates are still rising, and an economic downturn is a real possibility. How to prepare? What to count on?

It starts with thinking about possible downside scenarios in the near term. The smartest investors are always aware of what factors are most pressing for the markets and the economy at any given time. And what are the biggest risks we face right now? 🤔

Rates

Almost most important is what the Federal Reserve does. The U.S. Federal Reserve is tasked with not only keeping unemployment low, but also keeping prices in check throughout the economy.

With inflation at historically high levels since mid-2021, the Fed has had to aggressively raise interest rates since last year to restore the balance between supply and demand. If we've learned anything over the past decade, it's how much influence the Fed has on investor sentiment. Investors have come to appreciate loose monetary policy because it can stimulate economic growth and boost asset prices. From the beginning of 2012 through the end of 2021, the S&P 500 Index grew at a compound annual rate of over 14%, much higher than its historical average of 10%. Much of the credit for this goes to low interest rates and the Fed's significant expansion of its balance sheet.

Inflation remains elevated. This automatically means that interest rates are not going to come down anytime soon. And that could pressure stock valuations, which investors should keep in mind when allocating their portfolios and deciding which companies to own.

Housing

Another thing - interest rates have risen, and mortgage rates have risen with them. Given this, investors should not ignore another important risk, which is a cooling housing market. According to the data, the median price of homes in the U.S. fell every month starting last May. What's more, the number of homes sold in the month of December was down 37% year-on-year. And that could set off a chain reaction, experts say. The reason is the so-called wealth effect, where households that feel richer tend to spend more.

Recession

Higher interest rates have raised expectations that the United States will enter a full-blown recession this year, if it is not already in one. Businesses are cutting costs and laying off employees, sales growth estimates are muted and consumer confidence is down.

In the event of a recession, corporate profits are likely to be hit hard. We have already begun to see this in the recent financial reports of major banks, which are often seen as economic harbingers. While JPMorgan Chase and Bank of America posted single-digit profits, Goldman Sachs, Morgan Stanley and Citigroup saw double-digit year-over-year declines in profits. I've written about that too, for example, here: So what's next? U.S. bank results may portend a scary future

When there is even the slightest risk that a recession may be coming, the best course of action for investors is to properly prepare their portfolios to better protect themselves from downside risk. This means looking for companies that are resilient and recession-proof, as opposed to those that are unprofitable, speculative and debt-laden. Typically, $PG-0.7% is cited as an example.

Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.