Prediction Markets Are Flashing Recession Warnings. But Should Investors Actually Listen?

Given the ongoing conflict in the Middle East, the odds of a U.S. recession have been rising on prediction market platforms like Kalshi and Polymarket. Odds are currently hovering around 30%, although they have topped 35% on both platforms at times this month.

The question is whether investors should take heed and prepare for a potential recession. From a purely economic standpoint, the war and the blocking of the Strait of Hormuz by Iran could lead to higher prices at the pump, which is very likely to impact the U.S. consumer, who has already been struggling with high inflation stemming from tariffs. Meanwhile, the closure could lead to supply disruptions in other industries as well, as diverting ships to the Cape of Good Hope adds transport days and increases costs.

As such, the longer this conflict lasts, the greater the potential threat of a recession this year.

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However, while the 30% odds of a recession are relatively high, the odds suggest the market is still leaning toward there not being a recession this year. There is so much spending on artificial intelligence (AI) infrastructure right now that it is driving tremendous growth. Meanwhile, AI is also helping make companies more efficient, allowing them to automate tasks and improve productivity. The combination of heavy capital investment and rising productivity should help support corporate earnings even as recession risks rise.

What should investors do?

At this point, I think investors should stick to their strategy for the most part. If you have investments in some more economically sensitive stocks, you could consider paring back some of your positions.

However, I think that at the core of most investors' portfolios should be an index exchange-traded fund (ETF) like the Vanguard S&P 500 ETF (NYSEMKT: VOO). The fund tracks the S&P 500, which is composed of the 500 largest traded U.S. stocks. This gives investors diversification and a fund with a strong long-term track record. The ETF has produced an average annual return of 15.5% over the past decade, while less than 15% of actively managed funds have been able to outperform it.

Another reason why I like an S&P 500 ETF as a core holding is that it is a great investment vehicle in which to dollar-cost average. The market is going to experience recessions and bear markets, but by dollar-cost averaging into an ETF, it will smooth out your cost basis and help put you on a path to creating long-term wealth. Consistent investing can be just as important as stock picking, or even more important, so just stick to this strategy, and you'll be prepared over the long term for whatever comes next.

Geoffrey Seiler has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.