The Risks of Folding: Why Abandoning Recession Preparations Could Backfire

The term "FOLD" in investing—derived from the strategic decision to abandon a prior economic outlook—has taken on new urgency in 2025. Investors who "folded" their recession hedging strategies in late 2024, betting on policy-driven optimism, now face mounting evidence that the risks they dismissed are materializing. Recent data reveals a fragile economy, volatile markets, and a precarious policy environment. This article examines why folding on recession preparedness may prove costly and what investors should do instead.

What Does "FOLD" Mean in This Context?

"FOLD" refers to investors discarding their recessionary thesis, often in response to aggressive fiscal or monetary interventions. For example, many abandoned defensive positions in late 2024 after central banks hinted at easing policies and governments announced fiscal stimulus. The gamble: that "this time is different," and recession risks would be averted through policy magic.

But recent data suggests the opposite.

The Data: A Fragile Recovery

1. GDP Decline: The U.S. economy shrank at a 0.3% annualized rate in Q1 2025, dragged down by surging imports and weaker government spending. This marks a sharp slowdown from 2024’s 2.4% growth in Q4.
2. Labor Market Weakness: While unemployment remains low (4.2%), the hires rate—a leading indicator—has fallen to 3.4%, the lowest since 2013. A decline in hiring often precedes layoffs, raising recession concerns.
3. Equity Market Volatility: The NASDAQ Composite fell 11.1% from its February 2025 peak by April, while the S&P 500 dropped 6.1%. Technology stocks, once darlings of the "fold" strategy, led declines amid AI valuation corrections and supply chain disruptions.

Why Folding Now is Risky

1. Policy Limits Are Evident

Central banks and governments face diminishing returns on stimulus. The Federal Reserve, for instance, has cut rates to 4.05% on the 2-year Treasury, but inflation persists. Core services inflation remains stubborn at 0.2% monthly, while food prices spiked to a 17-month high due to supply shocks. Fiscal policy, too, is constrained: U.S. deficits hit 6.4% of GDP in FY2024, limiting room for new spending.

2. Market Disconnection from Reality

Equity markets, particularly in tech, have been buoyed by liquidity and megastocks (e.g., the "Magnificent Seven"), but this optimism overlooks structural issues. For example:
- Supply Chain Strains: Tariffs and geopolitical fragmentation have raised production costs.
- Corporate Debt Risks: $2.8 trillion in leveraged loans and high-yield bonds mature in the next two years, with refinancing challenges in a higher-rate environment.

3. Asymmetric Risks in Bonds vs. Equities

While long-duration bonds have rallied (10-year yields fell to 4.26% in February 2025), their returns remain asymmetrically favorable in a slowing economy. In contrast, equities face a "double whammy":
- Earnings Downgrades: Analysts have cut 2025 S&P 500 EPS estimates by 4% since late 2024.
- Valuation Pressures: The S&P 500’s price-to-earnings ratio remains above its 10-year average, leaving little margin for error.

The Case for Recession Hedging: Evidence and Strategies

Investors who maintained recession hedges (e.g., Treasury bonds, consumer staples) have fared better. For example:
- Utilities and Staples: These sectors outperformed the S&P 500 by +3.5% and +2.1%, respectively, in Q1.
- Cash and Short-Term Bonds: The Bloomberg U.S. Aggregate Bond Index, with a 4.26% yield, provides a cushion against equity volatility.

Conclusion: Don’t Fold Without a Plan

The data paints a clear picture: folding on recession preparedness in 2025 is a gamble with high downside. The economy is slowing, policy tools are stretched, and markets are disconnected from underlying risks. Investors who abandoned defensive strategies now face a stark reality:

• GDP contraction (0.3% in Q1) signals a loss of momentum.
• Equity declines (NASDAQ down 11.1%) highlight overvaluation in growth sectors.
• Bond resilience (10-year yields at 4.26%) underscores the value of duration in a slowing environment.

The lesson? Folding requires discipline, not just optimism. Investors should:
1. Rebalance into defensive assets (e.g., utilities, consumer staples).
2. Leverage bonds with asymmetric upside (e.g., short-duration corporates).
3. Avoid chasing frothy sectors (e.g., overvalued tech stocks).

In a world where "this time is different" is a dangerous mantra, hedging remains the safest fold.

This analysis underscores that abandoning recession preparations without a contingency plan is a high-risk strategy. The numbers speak: in 2025, folding may mean folding under the weight of poor choices.