Investors, Take a Deep Breath
“Kill ’em all and let God sort ’em out.”
That’s the slogan of the U.S. Army Special Forces, aka Green Berets. Lately, it seems to be the slogan of Wall Street.
Stocks have been getting slaughtered across the board, whether some equities deserve it or not. Retail stocks, in particular, are swooning as analysts infer from recent retailer earnings misses that an economic slowdown, perhaps in the dreaded form of stagflation, is in the cards.
I don’t think some of these stocks, notably Target (NYSE: TGT), warrant such punishment. I’m confident that time will prove me correct. But the collective mood among investors right now seems to be, well…kill ’em all.
Freaked out by the stock market’s steep declines lately? Take a deep breath and remember that weakness in the overall market isn’t sufficient reason to dump inherently strong stocks. Markets rise and fall, but over the long run a well-diversified portfolio provides the best gains.
Fear and uncertainty breed volatility in global equity markets, and for months we’ve had plenty of both. But as a rule, don’t let the alarmist headlines spook you into selling. The last thing you want to do is prematurely sell your stocks out of panic. Long-term investors should not be spurred into impulsive actions by short-term declines.
That said, recent losses have been unnerving. The major U.S. stock market indices nosedived Wednesday, as follows: the Dow Jones Industrial Average -3.57%; the S&P 500 -4.04%; the NASDAQ -4.73%; and the Russell 2000 -3.56%. The catalyst for the plunge were earnings misses from such bellwether retail stocks as Walmart (NYSE: WMT) and Target (NYSE: TGT).
In pre-market futures trading Thursday, the major U.S. stock indices were poised to extend their losses. The combination of inflation and higher interest rates also is giving technology stocks a tough time. The tech-heavy NASDAQ is trading about 30% below its all-time high.
Fact is, retail sales for April came in healthy and consumers are still spending, but inflation is eating into the retail sector’s profit margins.
The roller-coaster action we’ve witnessed in recent days has followed a pattern. There is a decline that attracts bargain hunters. That drives a partial recovery. Then there is another leg down.
Charles Dow wrote about that pattern way back in 1901: “The swing of prices in and after a panic is always the same in character although of course not in extent. The figures have almost invariably shown first a severe drop, then a strong recovery, and then a relapse carrying prices back from one-half to two-thirds the amount of recovery.”
Investors are worried that the global economy could soon be heading for another recession, and those fears have once again inspired a “risk-off” mentality in the markets. Anxious investors are increasingly looking for ways to insulate their portfolios from market volatility.
But as always, you need to keep your sense of perspective. Take a look at the following chart:
As the chart shows, there have been several occurrences over the past five decades of stocks selling off by nearly 20%, before bouncing back based on strong underlying fundamentals.
Wait out the pain; stick to your long-range strategy. I recommend that conservative investors place stop/loss orders on their long positions. Although risk tolerance is unique to each individual investor, a 10% stop should suffice.
If you’re convinced a bear market is becoming ensconced and you hold significant long positions in the market, an effective strategy is to buy inexpensive short and long-term puts on the major indices.
Also consider increasing your exposure to gold-linked assets. During times of uncertainty, such as we face today, investors rely on gold as a hedge against crises.
Financial instability is a danger for risk-on assets, but it’s manna for gold. When the market crashes, money flees to safe haven assets, chief among them the yellow metal.
Every portfolio should contain gold, especially now. For details on our favorite gold play, click here.
John Persinos is the editorial director of Investing Daily.