Until now, we’ve had roughly 40 years of low inflation.

Cash seemed safe. Bonds were a sure thing. Tech stocks roared higher, higher and higher.

And who cares if they had no earnings?

You were paying for future profits. Anyway, with rock-bottom interest rates, you weren’t exactly missing out elsewhere. Only losers accepted 0.1% at the bank. “Do you really want to be a loser?”

That has been the story now for many, many years.  

Investors are overwhelmingly positioned in the types of stocks to match.

But what happens when the tide turns – as it seems to be doing now?

Are all stocks safe during inflation?

The simple answer is no.

First you have the obvious problem of belt tightening.  

In 2021, inflation rose 5.1%. The Bank of England expects a 7% surge by spring. And don’t even get me started on energy prices. The average household is expected to pay £1,896 more!

Suppose Mr. and Mrs. Jones MUST pay that bill or starve.

Well, it stands to reason, they now have £1,896 less to spend elsewhere.

Businesses selling non-essentials and luxury goods are typically the first to get hit. Especially if they’re not diversified across different markets.

Second, stock values are usually based on future earnings.

Remember those money-losing tech stocks I mentioned? They don’t seem nearly as attractive now, do they? You’re waiting and waiting for them to earn cash in the future, when that cash will be worth a lot less.

When inflation rips, you can’t afford to wait.

You need the earnings now.

Finally, there’s the problem of rising interest rates.

This typically happens during inflation, because bond holders must be compensated for the loss of currency value.

If you could earn, say, 5% holding a government bond, why hold a stock paying less?

Stocks must offer greater rewards than low-yield bonds, because the risk is that much higher. If they don’t, expect share prices to fall.

So, where should you put your savings?

If cash is losing value, bond prices are cratering and shares risk getting hammered, is anywhere safe?

As it happens…

3 types of shares tend to soar during inflation

These are the sectors I would focus on first.

No, I’m not saying these will make you an overnight millionaire.

Nor am I saying there won’t be bumps in the road.

However, if inflation does stick around – as I personally believe – I would expect them to do well over the long term.

These include:

1. Consumer staple stocks

 Of course, it’s easy to give up that luxury holiday or new car.

However, some things you simply cannot do without.

Consumer staple companies – producing food, toiletries, cleaning products etc – offer more protection, and there are a good number in the FTSE 100. By selling essentials, they can afford to raise prices without losing customers.  

This helps cover their own rising costs.

2. Commodity stocks

Most people think of inflation as “prices rising.”

Actually, it’s more accurate to call it “pounds falling.”

When you see inflation this way, you instantly appreciate the value of physical, tangible assets.

And what could be more tangible than the raw ingredients we use every day?

Oil…Copper…Fertiliser…Silver…natural gas…livestock…grains…

Unlike cash, commodities have intrinsic value.

That’s why their prices tend to rise when the value of cash falls.

It’s very good news for companies producing these vital commodities.

Their earnings can be expected to rise, without any new innovations or investments.

3. Value stocks

The simplest way to judge a stock is to look at its price-to-earnings ratio.

How much is your business earning relative to the price you pay?

Value stocks are priced low relative to the market’s average.

Since you’re paying less for today’s earnings today, you’re not waiting so long for your investment to see a return. And value stocks often pay healthy dividends. This cash can be reinvested, or spent elsewhere, before its value falls.

Of course, this isn’t a foolproof blueprint. You must choose high-quality companies within those sectors within your stock picks.

The post Which stocks soar during inflation? appeared first on The Motley Fool UK.

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How safe is cash?

Well, if you were around in the 1970s, you’ll know that cash can be a disaster.

Between 1970 and 1980, the pound fell to a quarter of its value.

Think about your shopping and utility bills. 

Can you imagine paying four times more every month?

This has happened before. It can happen again.

And even if it doesn’t, you know that inflation is always there. You see it almost everywhere you spend.

[top_pitch]

This is the big risk of holding too much cash in an ISA

Nowadays, the interest you get from a savings account does not keep up with inflation.

Over time, you are almost certain to lose.

Most people see inflation as ‘the cost of goods rising.’

This isn’t quite right.

It’s much more accurate to say ‘the value of your pounds is falling.’

Inflation happens when central banks “inflate” the currency in circulation.

As they print more money, and make it available at ever-lower rates, you have more pounds bidding up the prices of everything. Not just consumer goods, but assets like stocks, property and more.

It’s why you should at least consider a Stocks & Shares ISA.

Unlike a normal Cash ISA, you can fill this with a wider range of assets.

For example, when you own a stock, you own part of a real business. One which collects revenue and perhaps even pays a dividend.

If it’s a strong business, its value should rise with inflation.

Since its customers are also paying more, your earnings and dividends should rise too.

Just holding high-quality shares can give you real protection from inflation.

And if you hold them in a Stocks & Shares ISA, you’re protected from taxation too.

[middle_pitch]

You can also diversify your holdings

One easy option is to buy an exchange-traded fund (ETF) of, say, the entire FTSE-100.

Now you have exposure to Britain’s top 100 companies, all in one simple fund.

No need to follow the markets religiously.

You can buy ETFs in your brokerage just like any stock. Add more savings whenever you like.

Another benefit of ETFs: you can buy funds that focus on different countries. Or specific industries.

This lets you diversify your savings outside the UK.

India is just one interesting place to think about.

India has a rising middle class and a younger average population. That is a lot of people who’ll be earning and spending money.

You can position yourself for what’s ahead.

You don’t have to research every company in India.

Simply buy an India ETF and Bob’s-your-uncle. You’re done.

Of course, emerging markets like India are more volatile. However, the potential is explosive. And with an ETF, you spread the risk across dozens of companies.

What are the risks of ETFs?

Although ETFs free you from in-depth research, you shouldn’t buy them blind.

At the very least, have a peek at the fund’s top 10 holdings. Make sure they really are in the sectors promised.

Most funds will also have easy-read pie charts to show you how the money is positioned.

As you look at these, check they’re holding real assets. Some “synthetic ETFs” don’t actually hold shares on your behalf. Instead, they trade derivatives to try and track a benchmark index.

Unless you know really what you’re doing, these should be avoided.  

A very small chunk of derivatives (maybe 2%) is fine. But it should not be the bulk of your fund.

The post Why saving cash is riskier than you think appeared first on The Motley Fool UK.

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With a Cash ISA, the rules are simple.

You can add up to £20,000 a year, then collect interest on the balance.

Although this is easy, you’re restricted by what you can do with your money. And today’s interest rates are miniscule.

In short, the biggest cost of using Cash ISAs is the opportunity cost.

Your money could potentially work much harder elsewhere.

A Stocks & Shares ISA gives you more opportunities

Same as a Cash ISA, you pay no tax on what you make.

You can also manage how you use your ISA, depending on your tolerance for risk.

What are the 3 key ways you can use a Stocks and Shares ISA?

• You can buy stocks and bonds on your own. This is most efficient if you have some investing know-how. Or if you get help from investment newsletters like Motley Fool Share Advisor. You only pay your usual brokerage fees to place trades. You also stand to make greater gains.
• You can invest in active funds. Many brokerages offer their own managed funds which you can hold in an ISA. Fidelity, for example, lets you choose how you want to invest (for income or growth). It also asks questions about your risk tolerance. You’re then matched to a fund that suits your needs.

  ‘Active funds’ are actively managed by real people. When you add savings, that money is pooled into the fund and allocated on your behalf.

• You can invest in passive funds. A passive fund doesn’t rely on any human decision-making. It simply tracks a benchmark index. For instance, you can buy a FTSE-100 passive fund which (no surprise) follows the FTSE-100. As companies are added or removed from the list, the fund automatically follows.

[top_pitch]

Passive funds are most popular

They’re cheap and efficient.

Since you don’t have active managers the fees are much lower (typically below 0.50%).

You lose the hassle buying shares yourself.

Everything is done for you in one easy fund.

Passive funds have also outperformed active funds – by a lot.

According to MarketWatch, from 2009-2019, only 23% of active funds beat their average passive rival.

You pay lower fees and get a higher return.

What’s not to like?

Well, you should be careful.

[middle_pitch]

Passive funds have hidden risks that few people consider

These risks are arguably greater now than ever before.

First, passive funds have benefited from the enormous combined wealth of baby boomers.

Now this generation is retiring, they’re starting to draw from their savings. Since baby boomers are such a large, wealthy generation, passive funds will not necessarily match their previous performance.

Many passive funds are also market-weighted.

This means each holding is sized relative to the underlying company’s value.

Suppose you have a fund tracking the S&P500 (an index of 500 large U.S. companies). You won’t necessarily hold those companies in equal amounts. Since a company like Apple is extremely valuable, it might take a larger portion of the fund.

If Apple grows faster than other companies, it will push out your other holdings.

This exposes the biggest risk of passive investing.

As more money flows into the fund, more money chases those companies at the top.

Amazingly, the S&P500’s top 6 companies have a larger combined value than the bottom 494!

If they make up the bulk of your fund, you’re effectively “buying high.”

And you might not be well diversified at all.

How should you diversify in a Stocks & Shares ISA?

One possible solution is to use all three of the key methods mentioned.

You can use active and passive funds to help limit your risks across the stock market.

And you can do your own research to pick individual shares which you think are undervalued.

If you do this, set yourself some ground rules. For instance: “no more than 20% of your money in any fund, and no more than 5% in any stock.”

This stops you making haphazard emotional decisions.

The post 3 key ways to use a Stocks & Shares ISA appeared first on The Motley Fool UK.

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You may already have a Cash ISA with your bank.

But did you know that you can hold all kinds of assets in an ISA? And pay no taxes on what you earn?

The potential here is enormous, because some assets – like stocks – could make you far higher sums over the long-term.

When you own a stock, you own a small piece of a business. A real, cash-producing asset that’s working for you day after day.

Hold it in a Stocks & Shares ISA. You can collect dividend payments tax free.

Or, if your shares rise in value, you can sell them and pay zero tax on capital gains.

[top_pitch]

How risky are stocks?

You might be averse to stocks because they’re “risky.”

Your shares can fall in value.

The business you’re holding could take a financial hit. Or even go bankrupt and disappear.

These are all valid fears.

However, you can help mitigate these risks by choosing strong companies with steady revenues.

Good examples are utility companies.

No matter what the economy’s doing, people need heat, electricity and water. So utility revenues are usually less vulnerable to recessions and market swings.

What’s more, their dividend yields are often generous. 4-6% is typical, though of course not guaranteed.

These payments alone are far higher than any interest you’d get in a Cash ISA.

[middle_pitch]

Don’t forget, cash also has risks

In fact, if you stuff cash under a mattress, you are virtually guaranteed to lose purchasing power.

Inflation is always eroding the value of your cash. Nowadays, it’s difficult to beat inflation with the interest from any savings account.

And today’s inflation is relatively low!

If you were around in the 1970s, you’ll know that inflation can really rip higher.

In 1975, inflation got as high as 24%. By 1980, the pound was worth almost 4 times less.

When inflation soars, cash and bonds are the absolute worst things to be holding. That’s why using a Stocks & Shares ISA to diversify your savings is generally a good idea.

Generous £20,000 ISA allowance each tax year

Right now, you can add up to £20,000 per year to your ISA.

This allowance is very generous. Most ordinary savers needn’t pay any tax on their investments.

You don’t have to report your ISA holdings to HMRC. This is a huge hidden benefit. As anyone with assets knows, filing your taxes can be almost as painful as paying them.

Your money isn’t tied up, either.

Virtually all stocks available in an ISA have a ready market of buyers and sellers. With a few clicks, your shares can be sold in seconds. The cash appears in your brokerage account, ready to withdraw.

Want to add more than £20,000 this year?

If so, you’ve all the more reason to act now.

The cut-off date for ISA deposits is midnight, April 5.

Suppose you had £40,000 to invest, and hadn’t used an ISA this year. You could add £20,000 to your Stocks & Shares ISA now. Then, from April 6, add the other £20,000.

The post Why open a Stocks & Shares ISA now? appeared first on The Motley Fool UK.

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Did you know there are hundreds of “ISA Millionaires” here in the UK?

Many are ordinary people with normal jobs. They just had enough time, patience and discipline to save regularly and watch their money grow.

However, as you may have guessed, nobody’s getting rich with 1% Cash ISAs from the bank.

Instead, they’ve used Stocks & Shares ISAs to hold real assets – like stocks, bonds and funds.

These assets can pay you regular dividends and appreciate in value.

Over your life, you could collect £hundreds-of-thousands tax-free.

ISA Millionaires tend to be disciplined savers

That’s something else they have in common.

Every month, they set aside a regular amount. They aim to use their ISA allowance to the maximum.

Right now, your annual ISA limit is £20,000.

For most people this allowance is ample – even difficult to fill.

However, with a few tweaks to your approach, you can probably save a lot more than you’d think.

[top_pitch]

One trick is to save first, then spend

After every paycheck, put 10-15% in your ISA.

Do this the moment you get paid.

Budget your spending with whatever you have left.

If you can’t afford 10%, try 5%. If that seems too much, start with 1%.

The real goal is to start the habit of saving.

A lot of people spend first, then wait to see what they have left.

This rarely works.

When cash is readily available, it’s normal to spend more than necessary.

Buy high-quality shares and hold

Most ISA Millionaires are long-term investors.

They buy shares in quality companies and hold them for years – even decades.

If you’re new to investing, you can get expert guidance from a share-tipping newsletter like Share Advisor. Four expert analysts scour the markets. They research which stocks might offer excellent long-term value.

At the time of writing, their average recommendation is up 28.6%.

Long-term investing is perhaps the most important secret to this success.

The problem with buying and selling too often is you’re likely to miss the best days.

Suppose you’d invested £10,000 into an S&P500 index fund in 1999.

By 2019, your investment would be worth £29,845.

However, if you’d only missed the 10 best days in that entire 20-year period, your returns would have been slashed to £14,895. Missing only 10 days would have cut your returns in half!

[middle_pitch]

Long-term investors can also benefit from compounding

Going back to the S&P500 index, suppose you’d invested £10,000 in 1970.

By 2019’s end, you would have £350,000.

However, with one extra compounding trick, your £10,000 could have grown to over £1.6million!

You do this by reinvesting your dividends. Here’s how it works:

Many companies pay some of their profits to shareholders as ‘dividends.’

This money lands in your brokerage account, just like an interest payment from the bank.

However, many brokerages offer a ‘Dividend Reinvestment Plan’ (DRIP).

This lets you roll your dividends back into the company. You use them to accumulate more shares.

If your brokerage offers a DRIP, you should seriously consider using it. You may even make it a deciding factor when choosing a Stocks & Shares ISA.

As your holdings grow, you get paid larger dividends. These help you gather even more shares. Over time, your returns compound into a runaway snowball of gains.

It’s one of the biggest secrets to becoming an ISA Millionaire.

And it’s never too late!

As all ISA Millionaires prove, time is your greatest asset.

The sooner you start a disciplined plan, the more you stand to make.

But don’t kick yourself for the years you’ve missed.

Take advantage of all the years that lay ahead.

Whoever you are, whatever your age, the time to start is now.

The post How to become an ISA Millionaire appeared first on The Motley Fool UK.

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If you’re a shareholder, this undoubtedly makes you nervous. How much of your investment might you lose? Should you welcome the government stepping in? 

What is a government bailout?

First the good news: a government bailout might stop the value of your investment in shares going to zero. 

In a typical bankruptcy (i.e. without a bailout), a company’s assets are sold for cash. As a shareholder, you’re a part owner of this money. However, you probably won’t get paid. Most often, assets are sold at fire-sale prices, well below their fair value. The rules over who gets paid and when they get paid mean that bondholders and other creditors are paid first. Afterwards, the company might owe suppliers money for products, services or materials. Once these debts are covered, there is usually nothing left.

A government bailout might stop a company filing for bankruptcy.

The bailout may take the form of cash or a business loan. In other cases, the government might buy bonds. Or it could take part ownership – even a controlling stake – by buying shares. 

What happens to share values?

As a shareholder, you need to know what kind of bailout you’re in for: 

• If the bailout is in the form of a loan, you might check the free cash flow (in the company’s cash flow statement) and current assets to see whether the interest is easily covered. A company’s income statement reveals its current interest expenses. 
• If the government is taking part ownership, you need to know how much of the company it is buying. 

When the government takes part ownership

This form of government bailout can harm shareholders, especially in the short term. 

Imagine you have half a glass of fruit squash. You top it up with water. Theoretically, you have more squash, but it’s weaker. The same thing happens with your shares: any new shares sold to the government dilute the ones you own. Each share now represents a smaller stake, making it worth less. 

Thankfully, once the government has bought in, it is under heavy pressure to show taxpayers a profit. Realistically, that can only happen if the company performs well. 

For example, in the 2008 financial crisis, the government bought stakes in major banks. A bank, like any public company, has the power to create new shares and sell them.

The Lloyds bailout was moderately successful. The government now only holds about 1–2% of the company. With dividends, it made a modest profit for the taxpayer. Shareholders managed to stay afloat. 

The Royal Bank of Scotland (RBS) bailout, meanwhile, was objectively a disaster. The government took a majority stake, pumping in £45 billion. RBS showed nine years of consecutive losses and didn’t pay a dividend again until 2018. The government has admitted that its investment will probably never be recouped.

Warning: a government bailout may have strings attached

Some conditions imposed by the government during a bailout may make it harder for share values to recover. For example, a ban on stock buybacks could prevent share prices from recovering.

Stock buybacks have played a massive role in boosting valuations. Some companies use their free cash or even borrow cheap money to buy their own shares. With fewer shares on the market, prices go up, as do the reported earnings per share. 

Sometimes, buying back shares is smart. 

However, buying overvalued shares is hugely irresponsible.

Political battles could also hamper a full recovery. According to the Independent, the recent talk of airline bailouts has prompted more than 20 climate groups to act. The groups have written to Chancellor Rishi Sunak demanding that government bailouts be tied to new environmental regulations. 

Do government bailouts work for shareholders?

Each case is different. In short, holding onto shares could be a gamble. If you want to bail out of a company that’s getting a government bailout, watch the headlines closely. If your company enjoys some good news, the stock markets may become temporarily optimistic. This will cause the share price to rise, giving you a chance to sell. 

The post What happens to shares if a company needs a government bailout? appeared first on The Motley Fool UK.

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MyWalletHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers.

Many shops now don’t accept cash. Those who do, prefer you use card. And it seems everyone is insecure over the sudden change in etiquette. Nobody wants to make a mistake.

But should you be afraid of “coronavirus cash?” And if so, how can you protect yourself?

What we know about coronavirus and cash

If nothing else, you should be more deliberate when holding cash. Don’t touch it unnecessarily. Use contactless payments wherever possible.

But also be aware of other places coronavirus might lurk.

Early in the outbreak, a study found coronavirus can live on cardboard for 24 hours, and on plastic for three days.

If your cash hasn’t been used for a while, the risk of infection is low. A card machine’s keypad is arguably much more dangerous. It has been touched constantly by hundreds of other people.

Cash is not necessarily your worst option.

Anyway, even before coronavirus, cash was never clean

Many central banks are taking radical measures to quarantine and disinfect cash.

The South Korean central bank even burned huge piles of banknotes, desperate to rid the nation of coronavirus cash.

However, The Bank of England has made no such plans. As it has stated:

“Like any other surface that large numbers of people come into contact with, notes can carry bacteria or viruses. However, the risk posed by handling a polymer note is no greater than touching any other common surface, such as handrails, doorknobs or credit cards.”

In other words, cleaning cash is like throwing a deck chair off the Titanic. There are millions of other surfaces that pose the same threat.

The real difference comes down to you.

Coronavirus needs to enter your body somehow (usually through the nose or mouth). Be aware of your actions after handling cash. Wash your hands thoroughly. Or carry a hand-sanitizer while you’re out.

And please, don’t eat anything, or touch your face, until your hands are clean.

Even before coronavirus, cash was filthy.

These are always good habits to adopt.

The safest place for your cash during coronavirus

Maybe coronavirus cash is the least of your worries?

After all, this illness has also infected our economy. Recession is now almost certain, and you might be wondering if your cash is safe in the bank.

Thankfully, there’s no good reason to draw out more cash than you need.

In the unlikely event of a banking collapse, the Financial Services Compensation Scheme (FSCS) insures up to £85,000 of your cash per authorised firm. Check to see if you’re covered at its website.

For most people, £85,000 is more than enough coverage.

And if you do need more, why hold so much cash?

The post Should I avoid using cash during the coronavirus outbreak? appeared first on The Motley Fool UK.

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MyWalletHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers.

No more calls and letters from collection agencies. No more hassle. You’re free.

However, before you pour a (large) glass of wine to celebrate, you’ll want to make sure this problem is gone for good. Here are four things to do after paying off a collections account.

1. Keep a record of your statements

Most likely, your debt was sold to a collection agency by your original lender.

This is how it landed in a collections account.

It’s unnerving, because you’re paying off a collections account with a company you don’t know. Thankfully, most collectors are registered with the FCA (Financial Conduct Authority) and must respect your rights as a borrower.

Nevertheless, unscrupulous agencies do exist.

After paying off a collections account, you don’t want to risk having your debt re-sold. You don’t want anyone chasing you for further payments.

So print all of your bank statements proving your installments were paid.

These records may also come in handy when applying for a mortgage or credit card.

2. Get a written receipt

After paying off a collections account, wait a few days.

Then call the agency to make sure your payment has processed.

Once you’ve confirmed your balance is zero, ask for a written confirmation and receipt. Keep this with your bank records in case it’s needed for proof.

Also, ask to be removed from their records.

This prevents further hassle, and they are legally required to follow your wishes.

3. Know your credit score

Even after paying off a collections account, your credit score may be affected.

It suggests missed payments in the past. Your original lender likely sold the debt at a loss, and will report negatively to other creditors.

But don’t panic.

Time heals this wound.

Six years after paying off a collections account, this blemish should have left your credit report.

And you can take some action to solve this problem sooner.

Experian delivers detailed, up-to-date credit reports. If there’s anything harming your score, you can possibly have it deleted. Or, failing that, you can ask to leave a note explaining the problem and how it was resolved.

This shows other lenders you’re responsible.

Also, consider writing to your original lender. Ask them to remove the mark against you.

You’d be surprised how often this works.

Keep your letter short and polite. Avoid blaming the lender. Briefly list the reasons you had trouble paying and how you resolved the issue.

4. Attack your other debts

Paying off a collections account is a huge step forwards in your finances.

Now it’s time to make this change permanent.

List all of your outstanding debts, if any. Note down the balances, interest rates and minimum payments for each.

Pay down your highest-interest debts first. Do this as quick as possible, while paying minimum instalments on the rest.

There are huge benefits to paying off your debts early.

For most people, this is the fastest, most efficient way to make it happen.

Paying off a collections account does wonders for your finances

You’re saving money faster.

Your credit score improves.

And when you follow the steps above, your past problems are less likely to haunt you in the future.

The post 4 things to do after paying off a collections account appeared first on The Motley Fool UK.

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Do you have other debts you need to pay? Choosing the right personal loan could help you do this faster and save you money over the long term.

1. Bond Inversions

Bonds are viewed as a safe-haven asset for their guaranteed yields.

This makes them reliable at predicting recessions.   

When investors are nervous, they’ll flee towards longer-term bonds, causing yields to drop. When long-term bonds pay less than short-term bonds, you have what’s called an “inverted yield curve”.

It has preceded every recession of the last 60 years. And it happened again in March 2019.

2. Rising Volatility

As investors start spotting recession warning signs, you can also expect faster, more pronounced swings in the stock market.

The VIX index measures volatility in the S&P 500.

By March 2020, the VIX had jumped 300% in three weeks. This was its highest level since the 2008 financial crisis.

3. Higher Demand For Dollars

The U.S. dollar is used in around 60% of global trade.

It’s widely accepted. You can buy and sell dollars easily, or move them into other assets.

Like bonds, the dollar has ‘safe haven’ appeal.

During the recent market crash, dollar demand spiked but has been falling since. This might be the next recession warning sign to watch.

4. Falling Copper Prices

Copper is an industrial metal used in houses and manufactured goods.

This makes it an excellent barometer of the economy. When things are booming, copper prices rise.

However, prices have been falling since 2018.

It’s another recession warning sign that’s now flashing red.

5. Credit Card Defaults

It’s obvious, when people are strapped for cash they start missing bills.

Yet not all bills are equal. Houses are a lagging indicator, because people will always pay their mortgage first.

Instead, they’re more likely to miss credit card and auto-loan payments.

Last year, The Guardian reported that default rate on UK credit card debt was at its highest for two years. In America, auto loan delinquencies have also surged.

6. Rising unemployment

When unemployment rises 0.5% from its lows, recession usually follows. And it’s a very accurate warning sign, with a perfect 70-year track record.  

As of February 1^st 2020, unemployment was 0.3% higher than its November low. By this measure, the economy seemed to be holding up.  

However, unemployment is expected to explode higher due to the seventh recession warning sign:

7. The Black Swan

A “Black Swan” is an unpredictable event that significantly impacts the economy.

Today’s Black Swan is the coronavirus pandemic.

It has shut down huge chunks of the economy. It may be forcing you to take a hard look at your personal finances.

The latest figures still haven’t arrived, so it’s hard to know if we’re officially in a recession. However, it does seem almost certain.

GDP numbers are expected to be horrific, with some economists predicting a 30% slump and double-digit unemployment.

Recession Warning Signs Aplenty

Even before the coronavirus took hold, many of these recession warning signs were flashing red.

Now, with so much of the economy shut down, it seems impossible to avoid.

Nevertheless, recessions are a normal part of the economy. Some are deeper than others. What matters most is that you’re prepared.

The post Are we heading into a recession? 7 warnings signs to look out for appeared first on The Motley Fool UK.

More reading

• Is it game over for the BP share price rally?
• Amid geopolitical and AI risks, here’s how I’m positioning my ISA and SIPP in 2026
• My game plan for the next stock market crash
• 1 top growth stock to consider buying after it crashed 59%
• Here’s how a 35-year-old putting £15 a day into an ISA could end up earning £18k+ of passive income annually!