Yesterday, as the market was having its worst day for 6 months, I suggested that a downward move based on fear that the economy was doing well was illogical, and therefore a good opportunity to deploy any cash that you may still have on the sidelines. This morning, further declines were at least slowed by a jobs number that is good enough to confirm that recovery is in progress but not so good as to imply that the Fed will tighten quicker than they have said.
The market is well aware that higher short term rates will come at some point, it was the prospect of that happening sooner than was priced in that spooked traders. That data would suggest that the Fed has it roughly right. We are beginning to see the desired economic improvement, but we are far from booming territory and raising rates too soon would risk choking the recovery.
This is further evidence that stocks are not about to collapse as some have suggested. Henry Blodget may be polarizing, but he is nobody’s fool, and his Business Insider piece, which was picked up by many news outlets including Slate.com, predicts a 50 percent drop in the stock market and contains some interesting, persuasive arguments. It should, however, be read in the light of him having said the same thing before, for example in September of 2013.
Of course, at some point, if he continues to predict a big drop, he will be right. To be fair, Blodget freely admits that he didn’t sell then, nor does he intend to now, but even after yesterday’s horrible day, anybody who moved to cash out of fear in September 2013 would be looking somewhat wistfully at this chart of the S&P 500 since that article was published.
The point is that none of us know the future. I suspect not, but yesterday could be the start of a bigger drop for all I know. Whether it is or not, though, look again at that chart. If you had used every move down over the last 10 months, no matter how scary at the time, as an opportunity to add to your stock positions, you would have done pretty well. This one will probably be no exception as nothing major has changed, but the big question is, of course, what should you buy?
I am not able to answer that question in specific terms. Every person reading this has a different situation, both financial and emotional, and that is why for me to give specific recommendations would be stupid as well as illegal. What I can do, though, is make a suggestion that you may wish to consider.
In general, while downward moves are a good time to buy, they are not a time to be adding enormous risk. Always keep in mind the old saying that the market can stay irrational longer than you can stay solvent. I would rather use a drop as an opportunity to increase holdings of large, solid companies with global exposure and good sales; preferably one with a decent dividend. If you need to take some profit on some of your high fliers to do that, then go ahead; you’re never completely wrong to take a profit on a volatile stock.
For example, yesterday’s drop pushed the yield on General Electric (GE) over the 3.5 percent mark. The fact that GE has been somewhat disappointing over the last year as other, riskier stocks have soared is all the more reason to buy it on a dip, as it gives significantly more upside to what is usually a somewhat moribund stock.
I know, a suggestion to buy GE is hardly exciting and a headline that urges a “boring” play will probably drive less clicks than Blodget’s “50 Percent Drop”, but sometimes boring is good. The thing about stocks like GE is that, with a long history, extreme transparency, and extensive coverage, they are usually fairly valued. When they fall with the rest of the market for illogical reasons it presents a rare opportunity to buy them at a discount, so my suggestion would be to buy on the dip, but be boring!