From Correction to Crash: What to Do Now If We Are Headed to Rock Bottom


The “buy the dip” financial news teleprompter readers, and the 30-year-old portfolio managers that have never seen a market crash, are suddenly very silent and cannot be found. Market veterans and “hey boomer” professionals have seen this show before. Back in 1987, the Dow Jones industrial average plunged a stunning 22% in one day. The equivalent today would be a drop on the venerable index of almost 7,300 points.

Between 1929 and 1932, the stock market plummeted a stunning 83% and many people lost everything. That debacle caused the Great Depression, which really only ended when the United States entered World War II in 1941.

From 2007 to 2009, during the height of the mortgage and real estate collapse, which brought the economy dangerously close to another depression, the market dropped a huge 57%. When stocks finally bottomed at an ominous intraday low of 666 on the S&P 500 on March 9, 2009, we put in the floor for the longest bull market in history. That bull market may be ending.

Where do we stand now? Very possibly on the precipice of a much larger decline. The wild 1,000-point swings are not good at all. Massive margin calls exacerbate the moves to the downside, while algorithm computers scan every bit of data looking for news that could send shares up sharply and then back down just as sharply.

Last week Federal Reserve Chair Jay Powell paved the way for interest rate increases at every meeting of the Federal Reserve governors for the rest of this year and perhaps next year as well. While he tapped the brakes on any 75-basis-point increases, which gave stocks a one-day reprieve, 50-basis-point hikes in June and July are a given. The stated goal is to get the federal funds rate to 3.25% by the end of 2023. That is a long way from the current 1.00% or less level.

One positive is that, for the most part, consumers and businesses are in reasonably good financial shape. Stock portfolios and home prices have increased dramatically over the past few years, and the financial system is not teetering on the abyss globally as in 2008, when Bear Stearns and Lehman Brothers collapsed and Merrill Lynch had to be bought by Bank of America to avoid a similar fate.

One thing is for sure. The path of least resistance appears to be down, and trying to “fight the Fed,” which has to continue to raise rates to slow the worst inflation in over 40 years, is a losing battle. There are some important items for investors to consider now, as they may have to prepare for the worst.

1. Do not try to catch the proverbial falling knife. Instead, it may make sense to match current losses against gains, even if they are short term in nature, to help build up a cash supply. The proverbial dry powder may come in handy down the road.
2. Close out any positions on margin. Immediately, if possible. For individual investors to use margin loans to buy more stock is a bad plan when times are good, especially when those margin positions are high volatility momentum stocks.

3. A position in gold helps to mitigate the downside. This is something we have recommended for years at 24/7 Wall St., and as we noted recently, the precious metal very soon could be returning to all-time highs.

4. Reinvest all capital gains and dividends. That means making sure that all dividend-paying stock and mutual funds in personal and retirement accounts are coded for that reinvestment. This allows you to buy more shares when prices are hit hard. Most stocks and mutual funds pay dividends on a calendar quarterly basis, so investors have time to make sure their accounts are coded correctly before the second quarter comes to an end.

5. Think about real estate if you have the good fortune to come into a windfall, like an inheritance or something similar. While mortgage rates have increased recently, with the 30-year fixed rate rising to 5.42%, that is still extremely reasonable on a historical basis. Owning cash-generating rental property is an idea that makes sense now. Investors who need to look for stock ideas should seek extremely conservative ones that are not affected as badly by even the worst-case scenarios. In other words, companies that provide goods and services that are needed all the time, like utilities, telecoms, consumer staples, and real estate investment trusts.

The almost 13-year bull market has been a blessing and now may end up being a curse. There were numerous drops and corrections along the way. The fourth quarter of 2018 was a good example, when over a three-month period the S&P 500 declined 18% on an intraday trading basis.

Remember that even the most difficult events in human history and investing eventually have been overcome. Whether it be health-care-related, war-related, foreign geopolitical or domestic troubles, or any other issues, that have combined to cause market sell-offs, long-term investors generally always win in the end.

With COVID-19 mostly in the rearview mirror, the economy in reasonably good shape for now and the Federal Reserve finally doing what it should have done when it started raising rates in 2018 before reversing course, things should be brighter by the end of the year. The midterm elections will be hotly contested, and it is possible that Republicans win back the majority in both houses of Congress. That, combined with inflation starting to drop by 2023, and the table could be set for better times in the not too distant future.

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