I’ve never had a week in which so many people asked me when a recession will hit. And while I don’t know exactly when a recession will arrive, sooner or later, it’s bound to happen.
When confronted with economic danger, the first step you take should be to make sure you are doing NORMAL SMART STUFF. It’s a reminder to check whether you have fallen behind on fundamentals like whether your investments are properly balanced and whether you have enough in your emergency fund. Start there.
Next, consider if the situation presents specific risks to your household and what you can do to mitigate them. In this case that means checking whether you have particular career-related, care-related, or other risks.
Then, it’s time to avoid the temptation rush into solutions that may have side effects worse than the problem they purport to solve.
In this piece we’ll look at all three of these areas:
- Solutions that would have been a good idea even without Trump
- Solutions that we suggest considering *because* of Trump
- Solutions that still aren’t likely to help even with Trump
Warning Signs
I was quite nervous when Trump took over in his first term and he caused all kinds of harm to actual people, but not to the US stock market. Stock market returns were quite high (the S+P 500, for instance, was up ~70% during his term).
But the extreme change that typifies the second Trump Administration is an entirely new scenario, and markets and other indicators are beginning to react accordingly.
Since the early 20th century, the United States has relied on a non-political civil service under which most government functions are performed by people who are committed to following the laws in a nonpartisan way. That norm has been shattered. An early indication was when career civil servants were pushed out of the Treasury department, apparently for resisting granting billionaire Elon Must access to government payment systems until there were appropriate data privacy and cybersecurity protections in place.
Musk’s team, operating as the executive-order-created Department of Government Efficiency (or “DOGE”) has been systematically purging workers who maintain functions all across government including weather prediction, epidemic reporting and prevention, and tax collection, among others.
Many of those fired either directly oversaw government revenue and the country’s general economic stability, or worked to prevent or mitigate disasters (floods, fires, hurricane) that can themselves be major economic drivers. Other fired workers were important to the safety of the transportation systems (highways, air safety, ports, etc) that carry trillions of dollars of goods essential for the functioning of the economy and of course huge numbers of people everyday.
Firing a lot of government workers is quite bad for the government’s ability to perform key functions and it’s also really bad for the economy.
When many people lose good jobs, they can’t consume as many goods and it can trigger a recession. This might be especially true if other people grow concerned about a worsening economy and also cut spending. This pattern can lead to a vicious cycle where people cut their spending because they fear a recession, this triggers a recession, they cut spending further because of the recession (or because they have been hurt financially by job loss, stock losses, or other harms), and this leads to deepening and lengthening of the recession.
Keynesian economics taught us that we can disrupt this cycle with government spending (as Biden did during Covid). But will a Trump administration follow well-researched, historically efficacious approaches like this or stick with their heterodox views like favoring tariffs?
These changes leave me thinking that things are quite dire, but Trump is reported to watch a lot of cable news and care a lot about the stock market. Many of his backers are quite rich, he is quite vain, and also presumably wants the stock market to go up. This dynamic may have contributed to the stock market successes in the first term, and could serve as a corrective or limit to the damage currently being inflicted upon the economy. Now that the stock market is falling, will he walk back his tariff ideas again?
So, we’re living in interesting times. What can we do about it?
With the prospect of a recession looking increasingly likely, here is an overview of options as you consider your own financial planning. I’ve broken them down into three categories:
1. Things you can do to mitigate risk under “normal” circumstances (like a government that can competently regulate the economy), which are also good starting points under extraordinary circumstances. These are things you might have been wise to do in a Kamala Harris administration also.
2. Things you can do specifically to balance personal financial challenges and the additional headwinds likely under a recession scenario. These are things that one should do because of heightened specific economic risks that make your personal situation worse than it is under a normal administration.
If you work for the federal government and worry that your job could be under threat, or you are working in research or the academic sector and are concerned about funding, you might consider taking additional steps to mitigate future income changes.
Similarly: If you might need to move in the near future for any reason including changes in employment or health needs not being covered (such as trans folks in red states), now is a good time to examine your overall financial plan.
3. Things you should probably avoid doing, at least for now.
Risk-Reducing Moves That (Almost) Always Make Sense
Solutions that would have been a good idea even without Trump
Check in With Your Asset Allocation Plan
For most people with investments, most of the time it’s a good idea to have some of those dollars in investments that seek stability. These investments don’t perform as well as growth-oriented investments in the long run, but they are typically far less volatile and go down less in bad times.
For example, bonds, money markets, and bank CDs are all stability-oriented investments.
How much of those types of investments you should hold depends a lot on your life situation. People who plan to withdraw money over the next months or years need more of them and people whose investments are primarily for the long-term are generally better off with less.
The stock market has been mostly up since Obama took office in 2009. In periods where stocks have performed well, many investors ended up with a percentage far higher than they intended or makes sense for them. If the right amount of bonds based on your personal circumstances was 30% but you got all the way down to 15% because of the growing stock market, it would often be a good idea to rebalance. This would be true regardless of who won the presidential election. A scary economic climate is a good reminder to do something that was probably a good idea anyhow.
Fill Your Emergency Fund
Make sure your emergency fund is fully funded. Many investors plan to set aside money for an emergency situation without following through or replenishing their emergency fund after it gets used. Now is a good time to check the alignment between your plan and practice.
Risk-Reducing Moves to Account For A Challenging Financial Climate
Solutions that we suggest considering *because* of Trump
Adjust your Emergency Fund if Your Circumstances Have Changed for the Worse
Often clients ask some version of this question “based on [important news development] should we update our investments.” It’s a really excellent question and our answer is usually a question too: “have *your* plans changed?” and if the answer is “no” then usually it’s the right idea to stick with the plan. That plan includes stability-oriented investments for recessions and it also includes international investments for when the US declines but other countries do just fine.
But now, perhaps more than in the last several decades, the news is having negative impacts on people who were previously in quite stable financial positions. People working in “safe” industries like the federal government are finding that their livelihoods are imperiled.
For people who are at heightened risk of losing a job or have lost one and need to use investments to get by, it’s generally the right idea to build a bigger emergency fund and/or shift some investments from a long-term growth orientation to a short-term stability approach.
Here are a few examples of people who should consider expanding their emergency funds (or adding stability-focused investments):
- Someone who works at a federal agency being targeted by DOGE/Trump, leading to a higher risk of losing their job
- Someone who may have to move for professional reasons (it would be hard to get another job in their region)
- Someone who might have to move because of policy changes where they live like a trans person who might lose access to important medical care if the federal government stops blocking their local government allowing healthcare discrimination against them.
- A consultant who works with many government or academic clients
- A retiree who might need to support children or grandchildren who are at risk of losing jobs
There are so many other possible scenarios where people might be wise to devote more of their assets to stability, even knowing that this will diminish long-term growth.
Shift Retirement Accounts Rather than Taxable Investment Accounts
Many people know the research says market timing has been a historical loser, but still want to significantly reduce their growth-oriented investment allocation and increase their stability-oriented investments for personal reasons (as above) or, despite the research, can’t help trying to guess where the markets will go.
For those that will make a change, a few thoughts:
- Selling stocks that have appreciated to buy something that’s usually safer (bonds) can cause a big tax bill on the profit.
- You can typically avoid the tax bill by making that change in many types of retirement accounts (401k, IRA, etc) rather than making the sales in a taxable investment account.
Risk-Reducing Moves to Avoid (At Least For Now)
Solutions that still aren’t likely to help even with Trump
Pivoting to Precious Metals
People who are worried about inflation or government default have often bought physical gems, gold, or other precious metals. The spread on trading these items is generally 5% or more. At 5%, you’d get $95k worth of gold for $100k in cash and then when you sell the gold, if its price stays flat, you’d get about $90k in dollars back. Things have to go quite badly before items with those sorts of spreads are helpful. Plus you have to keep it physically safe from theft, destruction, and other forms of loss. It has its place but I am hopeful that we haven’t reached it yet.
My sense is that the main appeal of the precious metal approach is to have Krugerrands or other precious items available as bribes in a world where normal currency was no longer valuable or practical due to extreme inflation. But for someone who isn’t concerned about that scenario but does feel that they want to own gold, doing so indirectly may still be worth considering. Owning an ETF that owns gold (GLD is the biggest) avoids the upside of having the coins in your hands but also avoids the need to provide for the material’s physical security.
Embracing Cryptocurrency
Folks who swim in the tech utopian bubble might recommend cryptocurrency, but it still feels like a greater fool situation to me. There is no underlying value (or government sponsor). There are some genuine use cases for these cryptocurrencies, but chances are, that’s not the situation you are in.
Offshoring Assets
Many people have asked me about off-shoring money. There are two major versions, each with a meaningful drawback.
If you move money to a well-regulated country, it’ll be a US ally. Your investment options are likely to be similar (perhaps more expensive). You can still invest in US indexes or global ones, just as you can here. So that doesn’t change. What changes is that you’ll have a fair amount of paperwork and tax-related nuisance. The US can always move to seize your funds and an ally might well cooperate.
If you are worried about the US coming for your money, you might move it to a country that is hostile to the US or at least doesn’t comply with US court orders. The problem there is that those places might get you into trouble with the US for violating sanctions (Russia, Iran, etc) and wherever you put it, you run the risk that it’ll be nationalized, that is seized by that country.
For the moment, I’d caution away from this approach. Too much hassle relative to the benefit.
Leaving the Market Without a Re-Entry Plan
One of the biggest problems with getting out of the market is figuring out when/how to get back in.
If you decide to trade some stocks for bonds, make sure to have a market re-entry plan.
If you are wrong and the market doesn’t tank it could rise and you’ll need to decide when/how to buy back. The longer you wait, the more it might rise and the harder/more painful the decision will become.
If you are right and it goes way down, when will you start buying back? I think of a public health expert who thought people weren’t taking the Covid risk seriously enough in January of 2020. He anticipated the Covid-driven market crash perfectly and got out beforehand, but he didn’t buy back in (because he knew how long Covid would go on for) and ultimately had worse performance despite perfectly predicting a crash. The market bottomed-out, but he was still scared by the expanding pandemic. The market inched up from what we now know was the bottom and he sat it out. Soon enough, it was higher than it had been when he first sold but at that point it was enormously painful to get back in since he’d now been wrong several times. It’s really hard to manage the exit and *also* re-entry. This is part of why market timing hurts so many investors so much.
What now?
Thanks for sticking with me as we dug through:
- Solutions that would have been a good idea even without Trump
- Solutions that we suggest considering *because* of Trump
- Solutions that still aren’t likely to help even with Trump
I am hoping that some of the #1 solutions (normal stuff) are actionable for you.
If you are personally impacted, let me just say, I’m so sorry and you don’t deserve it. If it’s because of your public service work, activism, or research/academic work, or so many other things, thank you for what you do. And I hope some of the #2 solutions (Trump-era specific) were useful.
If you were thinking about some of the #3 “solutions” (ones where the side effects might be worse than the problem), I hope I’ve at least given you some things to consider and support your decisionmaking process.
If you found this useful, I’d be honored if you shared it since I am hoping it’ll be helpful to others who may not be in our orbit yet.
Always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any rates of return are historical or hypothetical in nature and are not a guarantee of future returns, which may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions and security positions, when sold, may be worth less or more than their original cost.