If you like wild, careening roller coasters with blind curves and death drops, then you were right at home in the stock market lately. Stocks fell, then rose to dizzying heights only to keel over and drop again. By the time the market ran out of time on Friday the Dow was down nearly 6% from its previous high and poised to see the red ink continue. Gains for all of 2014 have largely been wiped away at this point and a lot of investors are wondering where we go from here.
Correction Not a Crash
Whatever is going on it’s not a repeat of 2008. While the stock market may be correcting, the economy is not crashing. The credit markets are working, companies are still hiring and the economy is still growing. The concerns rolling up on the U.S. stock market, for the most part, stem from concerns over global growth, not the health of the American economy. Nevertheless, no country exists in an economic vacuum and continued troubles abroad will lead to trouble here.
The Dollar Shines
All the fear about markets in Europe, Japan and China is driving a flight to the dollar. While down from its really stratospheric highs, the dollar is still the place where investors feel safest. Being the cleanest shirt in the global money hamper is not necessarily a good thing in a world trapped in race to the bottom on currency valuations. A strong dollar may benefit consumers at a time when they could really use a break, but it makes products made in the U.S. more expensive on global markets and that will hurt exports. Any decline in goods shipped overseas will cause problems with employment and that will be a very big concern to the Federal Reserve.
Consumer Debt a Concern
Where the markets go from here depends on consumers. June was a great month for consumer spending but July was horrible; August was better but investors will be watching the September report carefully. There are already concerns that consumers are too far in debt for cars and are carrying too big of a balance on credit cards. On top of that worker pay remains stubbornly slow to recover.
Could Be a Long Correction
Adding up all those separate concerns still doesn’t add up to a crash but it definitely means we could have more room for stock markets to incur losses and the choppy volatility we’re seeing today could become the new normal for quite some time. Even a return to an average 8% return feels like a loser to many investors still high from the easy money years of 2011-2013.
Shift Focus To Defense, Income
The strategy I adopted a few weeks ago was switching my investments to focus on income and preservation by shifting to traditional defensive sectors and businesses that have historically been able to maintain earnings, even in choppy markets. Cities and county governments put off improvement projects during the recession but now that tax revenues are recovering, they’re once again issuing bonds for improvement projects. investing in municipal bond funds can smooth out some of the ups and downs of the stock market, if you’re willing to accept a slightly lower yield.
With the dollar still strong, this is also a good time to convert cash into things. There are indications that the dollar is still overbought and that makes this an ideal time to catch up on the fixed percentage of wealth you keep in hard assets like precious metals. Gold is in the range of $1,230 an ounce and silver is around $17. That makes high quality bullion products, like Silver and Gold Eagles an exceptional value with significant upside potential. Any other big ticket items you need, like refrigerators, central A/C units, washer/dryers, or freezers will be priced more attractively by a strong dollar.
The days of insane bull markets were fun while they lasted but the good times are over. It’s time to go back to the tried and true strategy of being sane, smart and diversified in your investment mix. We may be returning to the days when investors had to work for their returns and even that return to reality is going to be a bummer.