Some ways to safeguard your savings amid indications of an impending recession.

Financial experts have shared their top tips on how to protect your savings and invest if an economic downturn is imminent, as indicated by the flashing red recession warning signs this week.

Since 2006, the five-year Treasury yield has surpassed the interest rate on the 30-year U.S. government bond. However, the more closely-watched spread between two-year and 10-year yields inverted on Thursday for the first time since 2019, indicating a lack of confidence about the health of the economy.

Both Carl Icahn and Mohamed El-Erian have expressed their concerns about a recession to CNBC in the past week. They believe that the Federal Reserve's plan to raise interest rates more aggressively than initially planned could lead to more economic harm.

How can you safeguard your savings during a recession?

Drip feed investments

Young savers should invest some of their money in the stock market to generate inflation-beating returns, advised Sarah Coles, senior personal finance analyst at U.K. investment platform Hargreaves Lansdown.

Predicting the exact time of the next recession or market crash is nearly impossible, and waiting to invest due to an uncertain future can lead to catastrophic consequences, as she conveyed to CNBC via email.

Coles advised against investing a lump sum in the stock market and instead recommended drip feeding money to benefit from pound-cost averaging, which involves adding to your investments through different market conditions and economic cycles. This strategy helps smooth out any potential stock market volatility by making regular contributions to your investment pot.

Coles advised that if you plan to invest your money for less than five years, it's best to keep it in cash. To minimize any erosion of value due to inflation, she recommended shopping around for the best interest rate on a cash savings account.

Instead of trying to predict future interest rate changes, Coles advised focusing on obtaining the best rate currently available for the time frame that best suits your needs.

Investing amid rising rates

Whitney Sweeney, Schroders Investment Strategist, advised that investors should prioritize diversification and patience when managing their portfolio.

Last week, Fed Chairman Jerome Powell announced that the U.S. central bank could hike interest rates more aggressively to combat inflation, with market volatility remaining high due to the ongoing Russia-Ukraine war and central bank rate hikes becoming increasingly important for investors.

Sweeney explained to CNBC via email that the ambiguity and confusion investors may be experiencing is intentional because the yield curve is indeed confusing. Although there have been few instances where the yield curve has flipped and a recession has not occurred, it's important to remember that it hasn't happened every time.

As Icahn and Sweeney pointed out, the challenge was whether the Fed could successfully manage a soft landing while tightening monetary policy to combat inflation, without causing a U.S. economic recession.

Commodities, value, and cyclical stocks are the investments that have typically performed well during rising interest rates, as pointed out. Value stocks are companies that are undervalued and have strong fundamentals, while cyclicals are companies whose share price performance is affected by the economic cycle.

‘Jury’s still out’

Other strategists echoed Sweeney's point that a recession is not inevitable, despite the yield curve inversions.

According to Wells Fargo macro strategist Erik Nelson, there was an inversion in the mid-90s, but it did not lead to an economic downturn. Nelson also pointed out that there can be a significant delay of between 12 and 24 months from the time the yield curve inverts until a recession occurs.

Nelson highlighted that the yield curve is not the cause of recession but rather an indicator, and it is crucial to monitor Fed policy.

When the Fed's benchmark funds rate, currently at a range of 0.25%-0.5%, was raised to a "restrictive level," the possibility of recession became a concern.

According to Nelson, when a central bank starts to withdraw accommodative policy, buying stocks can typically lead to "pretty solid returns" at the end of the tightening cycle.

He stated that it is not advisable to begin selling stocks during an inverted yield curve, but rather to wait until the Fed announces that it is finished tightening.

Antoine Bouvet, ING Senior Rates Strategist, stated that economists predicted a 20% to 30% chance of a recession, but expressed concerns.

Bouvet expressed concerns about the Fed raising rates quickly, the impact of rising energy prices on consumption, and the softening of housing market indicators.

Whether or not that recession is imminent is uncertain, but it's a topic that's on everyone's mind.

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