For those looking to make their next move after last week’s market sell-off, the future direction of the market depends entirely on the state of the current economy.
The Dow is now officially in correction territory. To some, buying shares of American companies with strong balance sheets and solid cash flows might be too tempting to resist. For other market participants, this just may be the beginning of something far worse.
Market corrections have a funny way of becoming bear markets—or they may be wonderful buying opportunities.
As much as the Federal Reserve wishes to micro manage the U.S. economy, the central bankers cannot eliminate the business cycle.
Economies do not expand in perpetuity. Internal and external signs abound show the U.S. economy may be on the verge of a recession. Second-quarter earnings showed the cracks. Revenue expansion has been noticeably absent from corporate operating performance. Now, earnings adjustments point lower.
Externally, emerging market growth is in question, with numerous ramifications. One concern is the massive amount of country-specific debt now owned by mutual funds in America. A rush to the exits could trigger a contagion that could easily send stocks sharply lower.
That wouldn’t be such a bad thing in the long term; not so, however, in the short term—especially for buy and hold investors.
The way to this market, then, is to not be a buy and hold investor. If that lesson hasn’t been learned over the last 15 years, then your portfolio could take a major blow.
But, if you’re willing to be a tactical investor willing to ride the various waves of market gyrations, you’re far more likely to build wealth in the equity markets, regardless of whether the bear has arrived or it’s the best buying opportunity of the year.
You won’t perfectly time entries and exits into the market, but you don’t have to. As long as you’re in the general vicinity, you and your portfolio will do just fine.
Remember these two keys:
1. Minimize the damage when it’s being done.
2. Make lots of hay when the sun is shining.
When the market moves lower in the earlier and middle stages of the business cycle, aggressively buying stocks is your odds on favorite strategy for success.
That’s not the case at the end of the business cycle—and like it or not, that’s where we find ourselves today.
Caution is warranted. Be ready to buy, for sure; but be ready to sell, as well.
I’m prepping my list of stocks to buy at these discounts. I’m also ready to lock in profits on any bounce from previous trades.
About the only certainty is that the road will be bumpy for the next month or two.
There are many data points to collect along the way—including a possible rate increase from the Federal Reserve—before we’ll know exactly where we stand and can accurately determine the appropriate strategy for allocating capital for maximum gains.
Or you can just sit there with your buy and hold approach and hope for the best.
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