In an opinion piece for Bloomberg, Gary Shilling writes that the U.S. stock market is probably in a bear market, with the expectation that there will be a recession later in the year. In anticipation of that happening, Shilling suggests that investors begin to shift their portfolios from risk-on to risk-off in order to avoid more losses.

There are many factors fueling the current unprecedented situation, from supply chain disruptions caused by the pandemic to the war in Ukraine. The Fed poured $140 billion into the economy over the last 2 years and has now pulled almost completely back. So strategies that worked in the past might not work now but Shilling lays out a several thoughts in the article on what may or may not work:

• Going long on the U.S. dollar against other major foreign currencies, which will strengthen as the recession spreads, especially since the British sterling, the euro and the Japanese yen have been particularly weak.

• Treasury bonds will rally if the Fed cuts the fed funds rate, which they’ve done in the past when the central bank realizes the market has hit a recession.

• Even if the bear market and a recession unfold the way Shilling expects, “stocks are a long way from the bottom,” he writes. The S&P 500 could drop as far as 32% more with speculative stocks being the most vulnerable.

• Growth stocks could produce big losses if they don’t meet investor expectations, with Netflix being a prime example. After surging in the early days of lockdowns, the company now has the worst-performing stock in the S&P 500. Companies like Netflix depend on future earnings growth and are affected deeply by interest rates that discount those earnings in order to calculate current stock prices. The NYSE FANG+ Index has declined 34% from its peak in November 2021 and that trajectory is likely to continue as the Fed raises rates.
  
• While homebuilding stocks have fallen already, they will likely fall further as demand for single-family housing declines due to rising mortgage rates. But while new home sales fell 8.6% in March, the number of new homes is growing, indicating the restored confidence homebuilders have after the subprime mortgage crisis.

• Covid isn’t gone yet; variants are still spreading around the world, especially in China where the IMF just cut its growth forecast to 4.4%. That’s far under Beijing’s target of 5.5% and doesn’t even come close to the double-digits that the world’s second-largest economy used to enjoy.

• Cash will be king, Shilling writes in the article, pointing to short-term securities like 3-month Treasury bills as a good bet to produce better returns than plummeting stocks. And while it may be tempting to take refuge in utilities, healthcare, and consumer staples, those sectors are not immune to a recession. During the 2000-2002 bear market, the only positive was a 24.2% rise in consumer staples; everything else declined by double digits.

• Some companies, such as Proctor & Gamble, believe that consumers will start to balk at the price increases that have driven the unprecedented growth they’ve been enjoying recently. Many households are saturated with pandemic purchases and consumers are spending less. Companies that saw abundant growth in the last two years and are now experiencing a decline in sales include Whirlpool Corp, mattress-makers, and the online used car dealership Carvana. And the bear market likely won’t go into hibernation until it becomes clearer how the recession will play out and the Fed shifts out of tightening mode. “That may not be until 2023,” Shilling writes in the article’s conclusion.