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A recession-ready income strategy

Key takeaways

  • Investment-grade bonds, US Treasury securities, high-yield bonds, floating-rate loans, and stocks of gold miners are among the income investments that may offer opportunities in the second half of 2023.
  • Investing in a wide variety of assets may help investors meet their needs for income despite the increasing potential for an economic slowdown.
  • In exchange for higher income, some assets may experience more volatility than traditional income investments.
  • Professional investment managers have the research resources and investment expertise necessary to help identify opportunities and manage the risks associated with higher-yielding security types.

First, the bad news. Fidelity’s Asset Allocation Research Team expects that the US economy could slow and potentially enter a recession in the second half of 2023. Recessions are times when economic activity contracts, corporate profits decline, unemployment rises, and credit for businesses and consumers becomes scarce. None of this is good news for stocks. Indeed, during the 11 recessions the US has endured since 1950, stocks have historically fallen an average of 15% a year.

This history may suggest that selling stocks before a recession arrives and buying them after it departs would be a smart strategy. But savvy investors know that it is extremely difficult to do this successfully and it’s often a recipe for locking in losses. A better idea may be to review your portfolio and consider diversifying with other investment opportunities that could help you stay on the path toward your long-term goals, recession or not.

Adam Kramer manages Fidelity® Multi-Asset Income Fund (FMSDX). He invests in a wide variety of income-oriented assets and seeks returns that are comparable to what stocks have historically delivered, but with much less volatility than stocks, which have historically struggled during recessions. Kramer says, "No matter where we are in the business cycle, it's always a good time to be a multi-asset income investor. I think of it as 'doing more with less.' That means 'doing more stock-like returns, with less stocks and less volatility.”

Unlike managers of strategies that can only invest in a few types of assets, even if those may not present the most attractive opportunities, Kramer looks for high-quality assets whose prices have been temporarily pushed down by investors overreacting to uncertainty about factors unrelated to the ability of the assets to deliver yield to the investor who holds them. Given widespread anxiety about where the economy may be headed, that means this may be an especially fruitful time to look for mispriced assets.

"Market conditions constantly change and the investments that deliver the highest returns today may not be the ones that do so next month or next year," says Kramer. "For a long time it was stocks, stocks, stocks. This year, though, I believe the best-performing asset class is likely to be something other than stocks. We're trying to find investments that have a recession already priced in,” he says. "There's always an opportunity no matter where we are in the business cycle. The flavors are always changing.”

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Opportunities in investment-grade corporate bonds

“We've been gravitating to investment-grade bonds,” says Kramer, “because if inflation doesn’t slow down, a slow-down in the economy seems inevitable.”

History makes a strong case for these types of high-quality bonds in an economic downturn. In every recession since 1950, bonds have delivered higher returns than stocks and cash. That's partly because the Federal Reserve and other central banks have often cut interest rates in hopes of stimulating economic activity during a recession. Rate cuts typically cause bond yields to fall and bond prices to rise.

Kramer says that investment-grade bonds of high-quality companies can provide an alternative to owning those companies’ stocks in an economic environment where bond prices have historically risen and stock prices have fallen. Right now, the interest payments—known as coupons—on many investment-grade bonds are also higher than they have been in recent years. Those coupon payments, as well as their prices in the marketplace, contribute to the total return of these bonds.

Keep in mind, though, that the bond universe is a far more vast and variegated place than the stock market and not all bonds perform equally well during recessions.

Among the most attractive investment-grade bonds right now, according to Kramer, are those issued by utility companies, master limited partnerships that operate oil and gas infrastructure, and big US money-center banks. “Some of these fixed- and floating-rate subordinated bonds as of June 23, 2023, are paying current yields of 6% or 7%, are trading at 90 cents on the dollar, and will begin to float at more attractive yields in 1 to 3 years. A few years ago, you’d need to look to bonds issued by companies with much lower credit ratings to get those types of yields. Many of them are callable in 1 or 2 years so there's not much duration risk either. I think that there's been a lot of bad news priced into not only regional banks but also money-center banks and utilities.”

Opportunities in high-yield corporate bonds

While a potential economic slowdown might seem to raise risks that non-investment-grade bonds could default, Kramer says high-yield bonds are available that offer current yields in the high single digits without excessive risk. In a diversified portfolio, those high yields could potentially offset declines in asset prices that often accompany economic slowdowns.

Kramer explains that, "High-yield bond yields are now exceeding the rate of inflation and I feel like you're getting a bigger bang for your buck in high-yield than stocks of the same companies. If earnings decline, high-yield bond prices are likely to be less volatile than stock prices. High-yield is also attractive because more than 50% of the market is currently rated just below investment-grade and presents relatively little credit risk. It's unusual in a good way that there are no sectors of the high-yield market that have higher levels of risk right now. Even if the economy gets worse, you could still earn close to 10% on high-yield with much less volatility than stocks.”

Opportunities in longer-term Treasurys

Besides investment-grade corporate bonds, government bonds such as US Treasurys have historically delivered higher returns during recessions than stocks or high-yield corporate bonds. For months, uncertainty about the lifting of the US federal debt ceiling had raised questions about the Treasury market but a bipartisan agreement to suspend the debt ceiling has allayed those worries and Treasurys are once again considered among the safest investment options.

In addition to the safety that comes from being backed by the full faith and credit of the federal government, Treasurys with maturities of 5 to 10 years may also present an attractive opportunity for return from both their relatively high current coupon yields and from a potential rise in their prices when the economy turns down and takes interest rates with it. “I think the economy slows, inflation slows, and the Fed eventually cuts rates," says Kramer. "If that happens and you have 5-, 7-, or 10-year Treasurys, you’ll be able to collect not just a 3.75% or 4% coupon yield but also start making total return as the rates move lower and the prices of Treasurys in the market rise.

And a stock opportunity too

While stocks have historically underperformed during recessions, the stocks of companies that mine gold could provide an unexpected source of opportunities if economic growth and interest rates come down in the second half of the year.

Gold has long been popular with investors who are concerned about the power of inflation to reduce the value of cash and other investments, but owning it also comes with risks. Gold miners' earnings have historically grown when demand has risen, as it often has in times when economic growth has been weak and real yields decline along with interest rates. Gold miners typically distribute a significant portion of those earnings to shareholders in the form of dividends.

According to a study by McKinsey & Company, the gold-mining industry is also likely to experience a wave of mergers and acquisitions in coming years, which could further increase the appeal of mining company shares for investors.

Like other stocks, dividend-paying value stocks of gold-mining companies have been affected by higher interest rates, but Kramer believes that both rates and a potential economic slowdown have already been priced in and gold miners now offer sustainable dividend payments of 4% to 5% as well as attractive stock prices.

Not all that glitters is gold

Of course, just because an investment is unfamiliar doesn't mean you want to buy it and professional management and research can help you manage the risks that come from venturing into less-common income investments. Investors interested in multi-asset income strategies should research professionally managed mutual funds or separately managed accounts. You can run screens using the Mutual Fund Evaluator on Fidelity.com. Below are the results of some illustrative mutual fund screens (these are not recommendations of Adam Kramer or Fidelity).

Multi-asset class income funds

Fidelity funds

  • Fidelity® Multi-Asset Income Fund ()

Non-Fidelity funds

  • Eventide Multi-Asset Income Fund ()
  • Invesco Multi-Asset Income Fund ()
  • Pioneer Multi-Asset Income Fund (PMAIX)
  • Putnam Multi-Asset Income Fund ()

The Fidelity screeners are research tools provided to help self-directed investors evaluate these types of securities. The criteria and inputs entered are at the sole discretion of the user, and all screens or strategies with preselected criteria (including expert ones) are solely for the convenience of the user. Expert screeners are provided by independent companies not affiliated with Fidelity. Information supplied or obtained from these screeners is for informational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of an offer to buy or sell securities, or a recommendation or endorsement by Fidelity of any security or investment strategy. Fidelity does not endorse or adopt any particular investment strategy or approach to screening or evaluating stocks, preferred securities, exchange-traded products, or closed-end funds. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from its use. Determine which securities are right for you based on your investment objectives, risk tolerance, financial situation, and other individual factors, and reevaluate them on a periodic basis.

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Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

The views expressed are as of the date indicated and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author, as applicable, and not necessarily those of Fidelity Investments. The third-party contributors are not employed by Fidelity but are compensated for their services.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security. Fidelity is not recommending or endorsing this investment by making it available to its customers.

Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for investments that focus on a single country or region.

High-yield/non-investment-grade bonds involve greater price volatility and risk of default than investment-grade bonds.

Floating-rate loans generally are subject to restrictions on resale. They sometimes trade infrequently in the secondary market, so may be more difficult to value, buy, or sell. A floating-rate loan might not be fully collateralized, which may cause it to decline significantly in value.

Preferred securities are subject to interest rate risk. (As interest rates rise, preferred securities prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Preferred securities also have credit and default risks for both issuers and counterparties, liquidity risk, and, if callable, call risk. Dividend or interest payments on preferred securities may be variable, be suspended or deferred by the issuer at any time, and missed or deferred payments may not be paid at a future date. If payments are suspended or deferred by the issuer, the deferred income may still be taxable. See your tax advisor for more details. Most preferred securities have call features that allow the issuer to redeem the securities at its discretion on specified dates, as well as upon the occurrence of certain events. Other early redemption provisions may exist, which could affect yield. Certain preferred securities are convertible into common stock of the issuer; therefore, their market prices can be sensitive to changes in the value of the issuer's common stock. Some preferred securities are perpetual, meaning they have no stated maturity date. In the case of preferred securities with a stated maturity date, the issuer may, under certain circumstances, extend this date at its discretion. Extension of maturity date will delay final repayment on the securities. Before investing, please read the prospectus, which may be located on the SEC's EDGAR system, to understand the terms, conditions, and specific features of the security.

The Fidelity Mutual Fund Evaluator is a research tool provided to help self-directed investors evaluate these types of securities. The criteria and inputs entered are at the sole discretion of the user, and all screens or strategies with preselected criteria (including expert ones) are solely for the convenience of the user. Information supplied or obtained from these Screeners is for informational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of an offer to buy or sell securities, or a recommendation or endorsement by Fidelity of any security or investment strategy. Fidelity does not endorse or adopt any particular investment strategy or approach to screening or evaluating stocks, preferred securities, exchange-traded products, or closed-end funds. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from its use. Determine which securities are right for you based on your investment objectives, risk tolerance, financial situation, and other individual factors, and reevaluate them on a periodic basis.

Value stocks can perform differently from other types of stocks, and can continue to be undervalued by the market for long periods of time.

The gold industry can be significantly affected by international monetary and political developments such as currency devaluations or revaluations, central bank movements, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries.

Fluctuations in the price of gold often dramatically affect the profitability of companies in the gold sector.

Changes in the political or economic climate, especially in gold producing countries such as South Africa and the former Soviet Union, may have a direct impact on the price of gold worldwide.

The gold industry is extremely volatile, and investing directly in physical gold may not be appropriate for most investors.

Bullion and coin investments in FBS accounts are not covered by either the SIPC or insurance "in excess of SIPC" coverage of FBS or NFS.

The technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants, and general economic condition.

Indexes are unmanaged. It is not possible to invest directly in an index.

The S&P 500® Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance.

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