How to Protect Your Portfolio in Uncertain Times

Every recession or bear market is driven by a unique mix of factors, and the investment strategies that work best depend on the specific circumstances behind each downturn. In this episode of Nest Egg, Lori Zager and Lisa James break down the complex web of rising tariffs, soaring national debt, and shrinking policy options that are currently challenging investors.

Join them as they explore actionable portfolio strategies designed to prioritize capital preservation in a landscape marked by recession risks and the looming threat of stagflation—where slow growth, rising unemployment, and higher inflation collide. Whether you’re a seasoned investor or just building your financial knowledge, this episode offers valuable insights to help you protect your wealth in uncertain times.

Find out more and reach out to us on our blog.

Transcript

How to Protect Your Portfolio In Uncertain Times

Lori Zager: [00:00:00] Welcome to Nest Egg. I'm Lori Zieger. I'm here with my partner, Lisa James. We are a team at Ingles and Snyder, an independent registered investment advisor. And our topic today is 

Lisa James: how do you protect your portfolio in uncertain times and certainly something that's on everybody's mind given the gyrations of the market tariffs.

Uh, economic results, what have you. The first and very simple answer is there is no one size fits all answer to this question. We actually get a little frustrated sometimes when we hear things in the news. As I did the other day when I was visiting my mother, she was listening to. And pr, and they were quoting somebody from another news service and who said, well, in an environment like this, you need to have diversification in your portfolio and you should own some stocks, some bonds, and some cash.

Like that was the answer. [00:01:00] And we actually don't think that's always the answer, and it hasn't been if you look at the past. So 

Lori Zager: every diversification alone does not. Eliminate risks, 

Lisa James: right? And every recession or bear market is actually driven by quite a unique set of events. You know, what strategies you use to protect your portfolio, particularly since some of these events you can see coming.

I'm not the pandemic necessarily, but a number of them you can, the strategies that work the best really depend on what the specific causes are. Of a downturn and what the prevailing political and economic circumstances are at the time. So we're gonna go over a couple different scenarios. You know, recessions in bear markets that we've had in the last 25 years.

So that would include the.com bust in the early two thousands. The financial crisis in 2008, [00:02:00] 2009, otherwise known as the Great Recession, the COVID-19 pandemic in 2020, and also the bear market that occurred just recently in 2022. 

Lori Zager: What was not a recession? So the.com bust was driven by excessive technology, stock valuations.

And, um, portfolio protection in that instance came from overweighting value stocks and mid and small cap stocks. And those stocks actually outperformed for almost 10 years. Um, their valuations were lower and it makes sense. That value stocks, which were largely outside the tax sector, had a period of outperformance, treasury bonds, and gold also served as safe havens and appreciated as investors sought safety.

Lisa James: But it was a very different environment in 2008 and 2009 because as its name, the financial crisis [00:03:00] was precipitated by weak lending standards by banks. And the packaging of mortgages into risky securities by investment banks. So banks were at the center of this crisis, and in this case, the value sector, which includes a lot of banks and financial companies, underperformed the general market.

So in, in this case, the value sector would not have helped you. But once again, treasury bonds and gold, uh, were safe havens and did quite well for investors compared to stocks. And part of this was. Because the Federal Reserve took, you know, pretty quick action, um, to cut interest rates. And then Ben Bernanke was the first one to institute what's called quantitative easing, where the Fed actually bought treasury and mortgage backed securities.

So you can imagine if the fed's in buying treasuries and mortgages, those [00:04:00] securities. Are gonna do well and their prices are gonna go up. And so that was actually a very good hedge during that particular crisis. 

Lori Zager: Then we had the 2020 recession, which was caused by non-financial things, uh, by the COVID-19 pandemic.

This particular. Very short recession. Uh, stock and bond markets both went into free fall. Cash helped, and gold briefly rallied at the beginning of the crisis. What happened is that the Federal Reserve dramatically lowered rates and the US government provided fiscal stimulus. By putting money directly into Citizens' Pockets.

So, um, that really helped us quickly get out of the problem. Treasuries rallied on lower interest rates and growth stocks soared. 

Lisa James: And why did that happen? Well, growth stocks tend to tend to do better in 

Lori Zager: lower interest rates environments, because basically how you look at a growth stock is you figure [00:05:00] out.

What it's gonna be with it's worth at some point in the future and discount it back at to today to figure out what you wanna pay today and how much you discount it back. Depends on what the prevailing interest rate is of. And during 

Lisa James: that period, interest rates came all the way down to 1%. So that was a very low discount rate.

And so gross stock stocks, you weren't paying a lot for growth in the future up. Right. Went up. I mean, those stocks went up 50, a hundred, 150%. It was, it was very dramatic. That's kind of the opposite of the.com bust, right? Because after the.com bust, we had technology in the doldrums for almost a decade, and all of the other types of companies that were sort of more moderate, slower growers did better yet, in 2020, immediately after the Fed started acting to prevent a recession.

The way to go was to own growth stocks. And now like if you go back, if you go to look at 2022, that was [00:06:00]another very different environment and it was really brought on by the government stimulus that happened in 2020, uh, as well as supply chain disruptions. So in 22, we had very high inflation inflation.

Reached 9% that year. So the Federal Reserve, whose job it is to moderate inflation and to keep employment high, they had to act. So with inflation heading towards 9%, they raised interest rates dramatically in order to slow down the economy. Which was growing very quickly and bring inflation down. Well, what happens when the Fed is raising interest rates and inflation expectations are climbing, bond yields go up because people are worried about the risk of further inflation, and they demand more yield from new bonds that they buy, and old bonds have to go up in price to be as cheap.

We had to, well, to give you the same amount 

Lori Zager: of. [00:07:00] Yeah, of 

Lisa James: return, right? So we had a tremendous change in the bond market. So part of the catalyst for the stock market decline was rising yield. So obviously treasuries did not help you like they did in the prior, and people were amazed in the prior recessions.

Lori Zager: People were amazed. Everybody had these 60 40 portfolios and they, they're like, wasn't wants help you. But 

Lisa James: you know, like a really dead giveaway was that they started Bond, started the year. At 1%. Okay. That is a ridiculously low interest rate, and it happened because the Federal Reserve had lowered rates so much to boost the economy after the pandemic.

So really in that period, you know, and I will give us a pat on the back for this. The way that you helped yourself was not to own bonds, and it wasn't. Actually that hard to figure out because bond interest rates were so low, there was really only one direction they could go. So your, your best strategy then was to own cash instead of bonds.

And [00:08:00] like the.com bust value stocks did 

Lori Zager: help 

Lisa James: you 

Lori Zager: versus gross stocks. You could also argue coming into this year. Given the high valuation and how much what? A large part of the s and p, like 34% of the s and p being in seven names, the magnificent seven that they really had nowhere to go but down. You know, the problem was they were overvalued probably a year before, so overvaluation valuation.

In and of itself is not a reason for, it's not an immediate reason to sell for socks to go up or down. 'cause they can be 

Lisa James: overvalued for a long time, long 

Lori Zager: periods of 

Lisa James: time. Yeah. 

Lori Zager: So, so what has everybody got their pants in a bunch about today? You know what, what's, what's everybody so upset about? Well, we've got rising tariffs.

We've got high national debt and deficits and. You know that, is it kind of limiting your flexibility? 

Lisa James: Well, we have, we have limited policy flexibility. Because? [00:09:00] Because of the debt primarily? Well, the, and because if something happens, we can't have a big fiscal stimulus, um, because we're already. So indebted 

Lori Zager: and, and excuse me, but Congress has no kahunas and the way that they get elected is by spending money or doing nothing lately.

So just to put it in perspective, the US has used tariffs before and unfortunately it wasn't a pretty time. It was the Smoot Holly Tariffs, and they were done in the 1930s, but the world wasn't. Um. It didn't look like it does today. We have globalized supply chains, we have interconnected economies, and we also didn't have such high debt levels that we have.

Uh, now, um, just to put in perspective, the national debt relative to GDP is near record highs. It's about a hundred percent of GDP. The budget deficit over the past year is 7%. And what's amazing about that is that we're spending more than we [00:10:00] bring in. In a healthy economy. Imagine, yes, imagine. Which is really a problem.

Just imagine right when things get bad, and as Lisa said, you know, this is a problem with this much debt. It really limits your ability to do things. It's more than that. About a third of our debt we don't even own. It's owned by foreigners and you know what? We're smacking him in the face. And at the same time with tariffs asking them to, with tariffs.

At the same time, we're asking them to buy our debt. And God forbid they keep selling our debt and they don't buy our debt, then what happens? So that 

Lisa James: puts pressure on interest rates, you know, so that that's really the big issue, 

Lori Zager: right? That we've gotta raise rates high enough to induce people to buy our treasuries.

Right? 

Lisa James: The other issue is, is the dollar. So, you know, one of the things that's been interesting this time around is often when you have tariffs. The dollar actually tends to go up [00:11:00] instead. I think a, a sign of trouble, you know, in the world is that the dollar went down, uh, in the face of tariffs and that seems like a somewhat of a vote of no confidence from the rest of the world that they're not as interested in buying American assets.

Lori Zager: Yeah. What's gone up is gold. Right, which I think we're officially known as the Golden Girls. 

Lisa James: Okay. So, um, what are the risks that we think we're gonna face because of, of these problems? Really, there are two different risks. One is that we go into a recession because the economy slows down due to uncertainty about the tariffs.

Prices go up, people buy less. People get paid, you know, uh, laid off because companies aren't selling as many products. Um, this is kind of the cycle that some economists think we're gonna go through in response to, especially the current size of the tariffs. [00:12:00] So a lot of people think that unemployment's gonna go up to 5%, um, by the end of the year.

Um, inflation can certainly go up. Uh, one or one or 2% just based on the price changes from the tariffs themselves. Just as a, an aside, just like there was never Mexico, never paid for the wall. Foreign countries are not gonna pay for the tariffs either. The tariffs are gonna be paid for either by the companies, by the person buying them in the United States, or the companies are gonna 

Lori Zager: eat it in terms of, you know, not passing through all of it, but it'll affect.

Their margins, right? We are gonna pay for it. Yeah. 

Lisa James: Either companies will have lower earnings because they, they will eat some of the tariff cost, or people will pay more for the good because there's a tariff. And then also it is true if there's some adjustment in exchange rates. And if, you know, some of the sellers cut some of their profits, you know, there can be little pieces all along the way of people paying for the par [00:13:00] tariff, but it is certainly not gonna be all the exporters.

It's not gonna be the form. Yeah. So the first risk was recession because of that. And, uh, the second risk is the one that lori's really into, which is stagflation. And I'm actually a supporter of that too. It would be a better scenario anyway than a recession, but it also seems somewhat 

Lori Zager: more likely stagflation is slow growth a coupled with rising unemployment and higher inflation.

It's actually the more scary of the, of the two scenarios. But, you know, I think. People aren't gonna think that's the most likely, even though we may think it's the most likely. Well, it's, it's the scary 

Lisa James: near term. A recession has a much worse down, down market than a stagflationary environment does. Unless it, unless it's, there's an oil embargo.

Lori Zager: Well, I think you could, we'll see, we'll see what happens. A stag, I think you could, I think you could shift what you own to help solve the problem. But that, that's for later in this podcast. Right. [00:14:00] But. Um, the problem is I think people are thinking recession first. So you do different things in a recession than you do in a stagflation environment because in a recession, interest rates go down and in stagflation because of the inflation component, they don't go down, right?

So you can't use bonds, which you would use in a recession. In a Stagflationary environment. 

Lisa James: Right. And this is, you know, it goes back to where we started this podcast, which is what's the situation now? What's driving the potential downturn and what are the characteristics economically and politically that are gonna affect what happens to stocks and bonds?

And this is ex exactly what we're saying. So tariffs. This is a tariff driven problem. So, I mean, the economy was chugging along quite nicely. I mean, you might say they were under underlying, I'm gonna, there were underlying problems, but yes. 

Lori Zager: Underlying problem called huge debt. Yes. I mean, the only difference between the Republicans is the Democrats, as far as [00:15:00] I can tell, is what they spend their money on.

Right. 

Lisa James: But I'm just gonna say the first quarter before the whole tariff thing, you know, the economy was doing okay. It was doing 

Lori Zager: okay. 

Lisa James: You know, there were underlying problems that would eventually come to roost, but it had not happened yet. Before the tariffs and all the tariff talk, you know, the s and p 500 was up like 6% year to date.

Tariffs, then put the hammer down and we got the 17%, you know, stock market sell off. And so we have a tariff driven possible bear market recession or stagflation. And the problem is that sometimes you can look out and say, well, I see a lot of signs. It seems like this is the most likely scenario to happen.

But when you have. Uh, a tariff driven economic change and the person who's in charge of the tariff can change their mind or change what they are at any time. It's very difficult to plan for it. If we have a recession, then [00:16:00] what do you wanna do? Yes, you wanna reduce your equity exposure. If it's the right circumstance, so we're not just saying, cut your e equity exposure no matter what.

If you're 20 years old or 30 years old and you're just putting money into your 401k, just keep on doing it. 

Lori Zager: But if you're someone like me who just loves equities to the moon forever, 

Lisa James: yeah, you cut your equities. I did. I did. So, but if you need your money soon, or if you are retiring and within the next two years, or you've just retired.

Um, your goals may have changed. You may not have changed your equity position over time. We've just been in a very nice B Bull market for two years. These would be people, it would make sense for them to probably adjust their equity position to something that is somewhat lower, and this is especially prudent.

When equities are expensive, which they are today, you know, we're looking at almost 23 times historical earnings, closer to 20 times forward earnings. The average [00:17:00] over, you know, 25 years is 16, so we can very easily say equities are expensive here. You've just had a nice run. The market right now is only down a little bit.

So if you are worried that you can't stomach a downturn or your circumstances lend themselves to reducing equities, it's not a bad time. You know, you can take five, 10% off the table and that thing maybe more depending on your 

Lori Zager: circumstances, nothing you can do. And we have done this and, but we, we got in front of this.

Which was you can shift your equities into dividend paying stocks. They, and so 

Lisa James: why do we think that's gonna work this time? 

Lori Zager: Well, when it doesn't 

Lisa James: work. Every time it 

Lori Zager: doesn't. 

Lisa James: Sometimes it works and sometimes it doesn't. So Well, they're cheaper. That's true. Well, they're cheaper 

Lori Zager: right now, for starters.

Mm-hmm. And also you've got inner recession. You know, again, rates come down in a recession, so. You, um, will get a steady income stream. And, um, what about the [00:18:00] banks? Well, the banks are usually at the scene of the crime. I don't think they're gonna be quite at the scene of the crime. This nothing like the financial crisis?

No, not like the financial. They first of all, are in better positions than the better position. Um, because of the regulations, which were a bit onerous, the too big to fail, banks aren't gonna be too big to fail. The, the regional banks are gonna have a problem if you get an inverted yield curve because they borrow money.

On the short end of the curve, and they lend on the long end of the curve. So if it's costing you more on the short end, which 

Lisa James: means like treasury bill, uh, rate, short term less than one year. So if it costs you 

Lori Zager: more on the short end of the curve and you have to lend it out at lower rates because. The curve is inverted or going down, 

Lisa James: meaning that like 10 year treasuries are a lower yield 

Lori Zager: than the bill, than the, than the treasury bills.

So, so regional banks are gonna get hurt, but the two big to fail banks are probably gonna be okay. I'm just, I, I, I've. Every good [00:19:00] crisis. The banks never seem, they always are in the wrong place at the wrong time. Seems like. Yeah, but 

Lisa James: they're not gonna be as much of a disaster as they were. 

Lori Zager: No. Um, 15 

Lisa James: years ago and in a recession 

Lori Zager: you would buy bonds, right, Lisa?

Lisa James: Well, I think, um, if you have a, um. Normally it would be kind of a no brainer to say that, but um, what we would say is, yes, bonds can help you. And first of all, compared to 2022, we're in a very different position. Bonds are like four, four and a half percent, depending on what day you look at them. And if you own corporate bonds, their yields are in the five to five and a half.

Percent range. So you're actually getting some nice yield from your bonds and that also helps protect you if bond prices go down a little bit. 'cause the, the yield that you get offsets it. But what's different this time, what's different this time is the level of our debt. Because our federal debt is so large and our deficits also continue to be large, despite Elon's efforts, [00:20:00] we're in a position where.

People might wanna buy bonds, but there might be more and more supply of them, so they might not actually rally that much. And it's also compounded by what Lori discussed before, which is foreign governments, especially if we're not. Buying their goods and putting dollars in their pockets, which they then reinvest in treasuries.

Those foreign governments may not be buying treasuries, and so it's gonna make bonds a little less, um, protective, I would say in a recession this time. I don't think it's necessarily a bad place to be for income, because if you're in cash, which is another safe haven, the fed's gonna be cutting interest rates in a, in a recession.

So your nice 4% yield on your money market fund, that could go down to two, you know, and maybe one, depending on how bad things get. So. That's not gonna help you all that much except that you would not be in equities that were falling. So [00:21:00] that's a reason why in this particular environment, I'd owned some bonds and some cash.

Um, but really our favorite thing to do is to own gold. And, um, and that has really been very successful in almost all of these recessions that we've talked about. The pandemic was a little different 'cause it was so short, so gold only rallied very briefly. Um, and then, you know, it was less interesting, particularly the economy 

Lori Zager: recovered if the, if the dollar is a problem.

That's a good, that's another reason. Okay. So what 

Lisa James: and why do we think gold would, would possibly be even better this time around than in prior recessions? 

Lori Zager: Well, because, because our dollar looks like it is weakening as people don't want to own dollars. 

Lisa James: We have central banks buying gold also to support their 

Lori Zager: own currencies.

And yeah, I mean. It's always been a store of value. I think there's, there is some question about the US dollar being the reserve currency. I don't think it's gonna happen tomorrow, [00:22:00] but you're already seeing everybody kind of biting at the edges. Yeah. 

Lisa James: They're trying to get around doing trades and dollars.

Right. Even oil, they're not 

Lori Zager: doing in dollars. 

Lisa James: Right. So if you look at Russia and Saudi Arabia and China, China, even India, they're not necessarily using dollars. Nope. Forget the petro dollar, right? It's gone. So that, that, that weakens the role of the, of the dollar in the global system. 

Lori Zager: So now to the scenario that I think is the most likely the, uh, idea of stagflation, that is not a necessarily where I would say.

Reduce your equities. I would say change your equity exposure because commodity stocks will outperform real assets. Tend to outperform in this type of environment. Now, in the 1970s, it was a specific oil shock that caused an embargo, and that problem doesn't exist in the moment. But there are other [00:23:00] commodities that could be in short supply and needed like food and rare earth minerals, although.

So my friend tells me that there's lots of rare earth minerals and, and they just did 

Lisa James: a deal. They just signed the deal of Ukraine, allowing the US to mine. Uh, rare earth mins. He actually says that there's a ton of rare earth 

Lori Zager: minerals in, in, uh, in Greenland. Between las, but no, between Las Vegas and Denver.

Oh, yeah. There one company that has the problem is. That we have regulations that won't allow us to, to refine them, 

Lisa James: but that'll change. 

Lori Zager: Yeah. Well, you know, it's, it's like, you know, you kill Peter to pay Paul. I mean, it's just, it's a problem. But, but anyway, commodities do tend to outperform. Well, and a, that 'cause the inflation because of the inflation part of it.

Lisa James: Yeah. Yeah. It's slow stag inflation. You know, it's, the thing about it that's not as bad as a recession is that you still are getting. Some economic growth. The problem is that the economic growth isn't worth much if it's inflated away. So people's [00:24:00] wages could actually, uh, their real wages could actually be going down because they might get paid more each year.

But if the rise in their wages is less than the rise in inflation, then their real purchasing power declines, and that's one of the bigger dangers associated with stagflation if it happens. 

Lori Zager: So, I mean, we've talked about gold and, and you know, gold really has been a safe haven and geopolitical, uh, as those tensions arise in trade disputes when the dollar weakens.

And although gold has, has done very well this year, we think you might get rest here. But we think that the longer term trajectory for gold is higher and beyond its role as a hedge and a stagflationary environment. We think gold is interesting if you are on the cusp of a shift in the global monetary order that we were just.

Talking about to correct distortions in the global financial system [00:25:00] and reprice real assets, then you're probably gonna get a significant devaluation of the dollar relative to gold. So we continue to like. Gold. Gold 

Lisa James: for either scenario. I mean, that's a thing. You know, given what we've said about both recession and stagflation gold is the one that works in both circumstances in 

Lori Zager: today's world.

I wanna end with one thing. A friend of mine, a very dear friend of mine. Sends me all the time, uh, a clip that was on Instagram of Warren Buffet, talking about how much the s and p 500 had gone up over decades and how gold had gone up. But you may have doubled your money versus I don't know how many thousand percent you would've made on the s and p 500.

And this is what I said to him, and I'll leave you with this thought, I think of gold as an insurance policy. I have insurance on my home. I have insurance on my car. I don't expect to make money on my insurance [00:26:00] policy. So if you look at gold as an insurance policy, which is what I think it is for these times that we're worried about, if you can make any money on your insurance, I think it's pretty good.

Lisa James: Yeah, 

Lori Zager: exactly. So that's all for now. 

Lisa James: Please visit us on our website. Two x wealth.ingles.net and you can feel free to email me, Lisa at two x wealth.ingles.net. Or Lori, 

Lori Zager: you can email me Lori LORI at two x wealth.ingles.net. That's all for [00:27:00] now.