Although I currently live in Maryland, I’m a native New Englander and over the next few days I’ll be sailing on Narragansett Bay with family and friends. The “dog days” of August historically represent the lightest trading volume of the year, so now’s my chance to enjoy Rhode Island’s scenic shoreline.

But even during these slow humid days, I’m keeping a wary eye on the markets. And if you’re on vacation, I suggest that you don’t get too comfortable in your hammock.

Triggers for volatility and sell-offs still abound. Economists at major investment banks are predicting a correction of at least 10% before the year is over.

Fueling these concerns is the looming prospect of a recession. Yesterday, the benchmark 10-year Treasury once again dipped below its 2-year counterpart, forming the dreaded “yield-curve inversion” that has been a reliable predictor of recessions.

Below, I’ll examine these risks and outline defensive moves that you should take now.

Powell’s neutral stance…

The annual Jackson Hole, Wyoming meeting of central bankers and academics started Thursday. At the symposium Friday morning, Federal Reserve Chair Jerome Powell delivered a much anticipated speech regarding monetary policy.

Powell’s remarks were typical “Fed-speak.” He didn’t commit to the deep rate cut that President Trump seeks, but he didn’t rule one out, either. Powell said the Fed would “act as appropriate to sustain the expansion.”

Powell’s neutral stance disappointed Wall Street, which craves further monetary loosening. As of this writing Friday afternoon, all three major U.S. stock market indices were trading deeply in the red. The Dow Jones Industrial Average was down by more than 500 points.

Trump’s series of bizarre tweets Friday, in which he wrote that he “hereby orders” U.S. companies to abstain from doing business with China, didn’t help Wall Street’s mood.

Also in his tweets today, Trump attacked Powell as the “enemy” for not aggressively cutting rates and compared his hand-picked Fed chair to China’s leader Xi Jinping. Welcome to the new normal.

Powell’s speech this morning came in the wake of the Federal Open Market Committee’s (FOMC) release on Wednesday of its July minutes, which revealed that FOMC officials aren’t likely to embark on long-term easing, despite July’s 25 basis point cut. The divided FOMC indicated a willingness, though, to remain flexible because of a slowing economy.

IHS Markit yesterday reported that manufacturing activity in the U.S. contracted in August for the first time in nearly a decade. New data on jobs raised a red flag as well.

The Bureau of Labor Statistics announced Wednesday that half a million fewer jobs were created in 2018 and the first quarter of 2019 than had previously been stated. Job report numbers routinely get revised after the fact, but the sheer magnitude of this downward revision tells us the economy hasn’t been performing as strongly as advertised.

A major headwind for the global economy is the U.S.-China trade war. China on Friday announced plans to slap additional tariffs on $75 billion of U.S. goods, including soybeans, automobiles and oil, as retaliation for Trump’s plans to impose 10% tariffs on nearly $300 billion of Chinese shipments.

Beijing’s moves came today as the G7 prepares to meet for what will probably be a contentious annual summit August 24–26 in France.

Let’s just assume, for the sake of argument, that Trump and China decide to quickly resolve trade tensions ahead of the 2020 election. The U.S. economy still faces serious risks, aside from trade.

Notably, the massive tax cuts that Trump signed in December 2017 have generated little in the way of economic growth. Businesses primarily used the windfall for stock buybacks and dividend payments, not investment. The tax cuts served as a shot of steroids for earnings and the stock market. Now the steroids are wearing off.

Trump’s promises of annualized 4% gross domestic product (GDP) growth are out the window, with forecasts now closer to 2% unless a trade deal can be reached.

One thing has been growing, though, and that’s the deficit.

The nonpartisan Congressional Budget Office (CBO) reported Wednesday that the federal budget deficit is projected to explode to more than $1 trillion in the next fiscal year. (see chart).

When running for office in 2016, Trump promised to not only balance the budget but also pay down the entire national debt. Not gonna happen.

The politicians in Washington, DC should spend less time on Twitter and more time studying Economics 101.

Deficits crowd out private borrowing and create marketplace imbalances. When the budget deficit is high, a large amount of government bonds must be sold to finance the deficit. The government, in turn, is compelled to offer higher rates of interest to sell enough bonds.

The interest rate on Treasury bonds is the most influential rate of interest within the broader economy. Accordingly, high deficits boost all borrowing rates for consumers and businesses, which worsens the economic downturn.

A recession occurs when there’s a period of falling economic activity spread across the economy, lasting more than a few months. A bear market occurs when stocks are down 20% from their all-time high.

Since 1950, the U.S. has witnessed 10 recessions and 9 bear markets. Nearly all of the recessions have overlapped with the bear markets (see chart).

Moves you should make now…

One way to recession-proof your portfolio is to increase your exposure to consumer staples. Invest in companies that provide products and services that people always need, regardless of the stage of the economic cycle.

Consumer staples are products that you’d find on any person’s grocery list: food, beverages, personal hygiene products, household goods, tobacco, etc. These are non-negotiable needs, as opposed to consumer discretionary.

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Historically, the consumer staples sector has outperformed during geopolitical-induced volatility, as investors seek safety that still confers growth. Conversely, the sector has underperformed when these worries have lessened.

Another recession-resistant investment theme is health services. I tend to think of this sector as the “medical-industrial complex.” The health sector is a cash-generating machine that resembles the partnership between the Pentagon and defense contractors. The numbers tell the story.

Total health care spending in the U.S. in 2018 exceeded the gross domestic product of many countries, including Brazil, the United Kingdom, Mexico, Spain, and Canada.

Federal government statistics reveal that Americans spent $3.65 trillion on health care in 2018, an increase of 4.4% over 2017. That translates to $11,121 per person, by far the most among developed countries. Experts estimate an average annual growth rate of 5.5% from 2018 to 2027.

Certain trends will continue, no matter who is sitting behind the desk in the Oval Office. One of them is the aging of the U.S. population, as Baby Boomers who went to college during the 1970s (folks like me) approach retirement age.

Even if a recession hits within the next 12-18 months, people still need to address their physical ailments.

Well-timed bets are real estate investment trusts (REITs) that specialize in health care facilities, especially those integrated within the Medicare and Medicaid programs. Also appealing now are companies that specialize in cost containment and make up the payment infrastructure of Obamacare.

For income investors, the good news is that many of these plays generate high dividends, especially health care REITs. When packaged in the form of high-yielding REITs, the investment appeal of the health services sector is even greater. Several health care REITs offer yields ranging from 4% to 9%, which is a strong return given the overall low risk.

As I’ve made clear above, a recession is coming. The laws of the economic cycle have not been repealed. In this volatile stock market, the days of easy sailing are over.

You can’t direct the wind, but you can adjust the sails.

Questions about bear markets and how they relate to recessions? Send your emails to: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.