Will There Be a Recession in 2024?

We believe there's a recession coming. The US economy will go into recession by the middle of next year. We're going to have a significant economic slowdown. There is a Day of Reckoning coming for the US economy. You've probably seen enough from the mainstream media to understand that in 2024, it's reasonably likely that we're going to see some form of recession. Interest rates are probably going to stay quite high; consumers aren't going to have a lot of spare cash, and that means revenues fall across major corporations. Economic activity lumps, and then you've got yourself a recession.

We're already seeing this happen in many countries around the world, but recessions are actually really amazing entry points for investors who think long-term. Prices fall, there's fear in the market, and that leads to fantastic yet temporary opportunities in the stock market. So in this video, let's look at five simple steps you can use to crush it in a recession and build your wealth.

Now, through this video, I just want to reinforce that this advice is general in nature and it might not be right for you, but these are certainly five steps to think about on your own personal journey to building wealth in 2024.

So step one is a really important step to take before you even think about the stock market, and that is to pay down high-interest debt. This always gets a mention in personal finance books, but it's actually really relevant at a time period like 2024. Why? Well, because of interest rates. While high-interest rates might be the reason the recession is giving us opportunities in the market, we have to remember that interest rates can also crush people financially.

So, if you have loans right now at a variable interest rate, the repayment you're paying today is a lot more than what it was just four years ago. If you're looking to get a 30-year fixed mortgage in the US right now, the interest rate you're signing up to is 7% versus 3.7% at the end of 2019. Rates are higher now, and with many of the world's brightest economists and investors predicting the interest rates probably aren't going down much in 2024, you have to take a step back and take stock of your loans, which ones are fixed and which ones are variable.

If you have credit card debt or a personal loan and it's got a super high variable rate on it, in most cases, it is a much better idea to pay down those loans than to do any form of investing with that money. If the stock market's historical long-term average return is around 10% per year, but the credit card is dragging you backwards at 20%, any dollar you have is better spent paying down that debt.

So that's the big step one, and it's particularly relevant right now. But then the next step to building wealth in a recession environment is to consider building a really solid base of long-term passive investments. Warren Buffett, the world's best active investor, even recommends this step. Now, this is not a particularly exciting step, but it will be the engine room of your future wealth.

What passive investors do is they don't rely on stock selection to build their portfolio; they choose to instead buy a little bit of everything. They spread their chips across the whole market, and then they cross their fingers that the future of corporate America will look somewhat similar to the past over time. As businesses flourish, then their stock portfolio rises with the broader market.

Now, of course, this isn't assured, and with investing, remember that past performance is not a reliable indicator of future performance. But overall, that's what passive investors are trusting: they trust that the future of corporate America will look something similar to its past. And this is a clever little strategy because it smooths out your portfolio.

Investors that pick individual stocks often see large swings in their portfolio, but with passive investing, say with the S&P 500, those chips are spread across 500 companies. Sure, some might lose, but if you land on a few that do, your portfolio isn't ruined. It's more about the performance of the market overall over a very long period of time. So that is most definitely step two to using the 2024 recession to build wealth: starting to filter money into the market broadly, thinking out 20 to 30 years.

But surely there's more to it than that, right? Well, for many, there won't be. That's probably as far as they'll want to go when it comes to investing, and that's totally fine. But there will also be a small subset of people that wish to actually go and do the digging, do the research, and take advantage of those bigger opportunities that a recession can often bring. These are the active investors of the world, those that analyze individual businesses and wait patiently for opportunities where they can buy great companies at discounted prices.

Recessions are really good at offering those sorts of environments. In 2020, were the biggest investors in the world buying or selling? They were buying. In 2008, they were buying. In 2001, they were buying. There's no doubt recessions can give investors huge opportunities, but you absolutely must be aware of two important steps to do this right.

So that brings us to step number three, which is to analyze the balance sheet. You need to ensure the business has lots of cash on hand and has low debts. Businesses with loads of cash can put out inevitable spotfires that happen during tough economic environments, whereas companies with little cash and a high debt load can easily buckle. It's the same with our own balance sheets, right? If we have cash in the bank and no debt, we're fine. But if we're living paycheck to paycheck and we have a boatload of debt, even a little rise in interest rates could wipe us out.

So, investors buying stocks across the next few years need to be acutely aware of the business's balance sheet. Have a look at a company like Google, for example. Now, full disclosure, Google is a stock that I hold in my own stock portfolio, but I'll still talk you through this in an unbiased way. So, start in the current assets section and have a look at cash and short-term marketable securities. Google has $120 billion just lying around that they can use to put out short-term fires—$120 billion.

But then let's have a look at their liabilities: no current debt. And then if we see here, $13.78 billion in long-term debt. So, they could pay back all of their debt load with just the cash on hand if they so desired, which is an amazing spot to be. Another little shake you can run is the current ratio of a business, which is current assets divided by current liabilities. With Google, you get 2.04. This means they've got two times the current assets to what they have in current liabilities, which is a very positive sign that they're going to be okay over the next 12 months.

Investors love seeing the current ratio at two or more. But then take another company, for example, Carnival Cruisers: $2.8 billion in cash or cash equivalents, $1.8 billion in short-term debt alone, and then $30 billion in long-term debt. Ouch! If we look up Carnival's interest expense, it was over half a billion dollars in 2023. How's that going to look in a few years when all their debts start rolling over at higher and higher interest rates?

Furthermore, if we look at current assets versus current liabilities, we see $4.68 billion versus $11 billion, so a current ratio of 0.42—AKA Carnival only has 42% of the money it needs to pay for the liabilities coming due over the next 12 months. So, for investors heading in and trying to find some deals in the market in 2024, we have to watch for cash and debt. If the company has lots of cash and no debt, it's very hard to go bankrupt. The other way around, well, it's a recipe for disaster in a high-interest rate environment.

So that's step three. But then from there, step four is to scrutinize every business you see for a competitive advantage. Warren Buffett called this a business's moat—it's the moat around the castle that keeps attackers at bay.

Now, there are lots of different types of moats out there. Apple has a brand moat, Microsoft has a switching moat, Coca-Cola has a secrets moat. Having a competitive advantage is essential during tough economic conditions because it keeps your business in place while other businesses suffer. Specifically, you need to look for a business with pricing power; this is the ability to raise prices for the consumer and suffer no ill effects.

So, over the past few years, Coca-Cola has been busy raising prices. It's the most expensive cola drink out there, but did their sales falter? No, they have a strong enough moat and some level of pricing power that they were able to raise prices and suffer only a minimal impact from inflation.

What about the "Apple tax"? We've all heard of that, right? There are lots of tech reviewers out there that can prove that the iPhone is technically not the best value for money, yet iPhone sales still top any other smartphone. Why? Apple has a moat that gives them pricing power.

So do some digging and take a look at where the sales and profits at your company have faltered over the past four years. If they've taken a massive hit, maybe the company you're looking at doesn't have pricing power. But if, despite all we've seen over the past few years, the company is still posting really strong results, chances are they've got something going.

Have a look at Microsoft: since 2019, revenue up and to the right, net income up and to the right, no faults. We had multiple lockdowns, inflation went crazy, interest rates are now really high, still no impact; they just kept going as per usual. That's what we're looking for—resilient businesses. So that's step number four.

And then step number five is quite simply to stay on top of your emotions. The crazy thing is it's not actually that hard to invest well. Passive investing is as simple as it gets, and even most people can find good businesses and run valuation models. The problem that plagues the majority of investors is poor investing temperament, and poor temperament becomes a really big problem in recession environments, particularly because things tend to be more volatile.

The news is all doom and gloom; there are people telling you to sell. The market gets very jumpy, and it's easy to panic sell in these times. The most important thing to remember, however, is Warren Buffett's quote: "Don't hold something for 10 minutes unless you're willing to hold it for 10 years."

The idea of really skillful long-term investing is to plan out an investment holding period of more than 10 years. You know, we're not looking to make a trade here or even be up on paper in the short term. The idea of investing in a recession environment is just to get a good entry point, to get a good starting point.

So, if we get a quality business at a great price and then it immediately drops another 20%, that's really good because we weren't looking to sell it for 10 years. We're simply using this turbulent time to get in so that when everything gets resolved in the economic environment and returns to a normal state, our business can continue flourishing, and the turbulent times no longer matter.

So that's the fifth key step: stay on top of your emotions. Now, if you enjoyed this video and you want to go to the next level and actually learn the step-by-step process to set up your finances across 2024, I will let you guys know that we are starting to take enrollments for our six-week program that will help you get started in the stock market.

So, spots are limited to 100 students. The program includes lifetime access to Stock Market Investing For Beginners, which is a four-hour video course on everything you need to know to get started in the world of the stock market. And alongside that, we're going to be doing five group calls across six weeks where I'm going to take everybody through the steps to start investing live. So, it's going to be a really awesome six weeks; I'm super excited to hang out with some of you guys.

So, if you'd like to get involved, check out the links in the description and the pinned comment. I would encourage you guys to get in now, though, as in the next week or so, we're going to start advertising externally as well, and we are anticipating those 100 spots to sell out quite quickly. So get in if you're interested.

But guys, apart from that, leave a like on the video if you did enjoy it, and I'll see you guys in the next one.