How to Invest When Everyone Is 'Uncertain'

As the current earnings season draws to a close, the word that best sums up the attitude of most companies to their outlook for the next few months is "uncertain." It, or similar words such as "cautious," which is how Walmart (WMT) described their view of the consumer this morning, has been used a lot to describe how most corporations see the immediate future for their businesses in particular and the economy overall.

Economists aren’t much help either. Uncertainty is in their DNA, which is why President Harry Truman once asked to see a one-handed economist so that he'd find someone who couldn’t say "on the other hand..." But the current situation has exaggerated that tendency towards ambiguity, with most saying that we might see a soft landing and strong recovery, but things could get worse before they get better. No s---, Sherlock!

Usually, the word “uncertain” is used in those contexts as a polite synonym for “bad” but in this case, it is being used literally. To put it another way, even the most informed and smartest CEOs and economists don’t have a clue what to expect, given that despite interest rates having risen rapidly from zero (which usually signals a recession or economic pain of some sort), unemployment is still low and consumers have continued to spend.

That creates a dilemma for investors. There is a chance that we will see a slow end to the year and a sluggish beginning to 2024, but we could also see a mini boom, or a crash. In short, anything could happen from here, so what should investors be doing?

First and foremost, you should be doing nothing drastic. This is not a time to go all in on your feelings about what is to come, either way. If you are someone who believes the Fed has got it just right and that things will be fine, stay invested by all means, but don’t go buying highly volatile, risky stocks in expectation of a strong rally. On the other hand (there's that phrase again!), if you have a more pessimistic mindset, you should not be selling everything and sitting in cash. That is never a good strategy for a long-term investor, but with two of the three possible scenarios resulting in market gains of some sort, it is a particularly poor one right now.

There are, however, a few tactical changes that you can make in your portfolio if you feel the need to do something, changes that reflect this cautious and uncertain markets outlook.

One strategy is to invest in quality at a time like this. Large, well-run companies will probably be fine no matter what happens. They may not offer massive gains if things work out just fine, but will still climb in even a sluggish economy. Should things go to pot, they will drop, but not as much as riskier stocks. Everyone will be aware that they will survive and, before long, traders and investors will start to bet on an uptick. When they do that, they typically start by buying high quality companies, so it makes sense to buy them now to ride out uncertainty.

That is why I said earlier this week that if you have cash to deploy, your best bet may be to buy obvious stocks, like NVDA, MSFT, AMZN, GOOG, and CRWD. I would probably add Apple (AAPL) to that list, and maybe a few less techy names that have done well recently, like GE (GE) or the aforementioned WMT, which looks like decent value on a dip such as we have seen today. However you do it, though, stick to quality names with proven profitability for a while.

If quality isn’t enough and you are still worried, consider hedging your portfolio risk, but only do this if you know you are a disciplined enough investor to do it properly. By that I mean you must understand that if you buy, say, a leveraged bear ETF or something that will go up should the market drop to offset your losses, it is a temporary strategy and must have an endpoint. That could be a certain level in the S&P 500, or it could be a date in the future, but things like the Direxion 3X S&P Bear ETF (SPXS), which typically have high fees and are reset daily, are unsuitable for long-term holding, so a disciplined approach to them is a must.

The other thing to consider if you are trying to position for uncertainty is the value of a dividend yield. Reinvested dividends always form a significant part of a portfolio’s total return, but when the outlook is uncertain, they are particularly valuable. The yield offsets some of the potential losses anyway, and if you reinvest the dividends, it means that you are buying stocks at low levels when the market drops, which exaggerates your returns when things improve.

This is one area where I might consider some stocks that have underperformed recently, while sticking to the quality-first idea. Big oil companies, such as Chevron (CVX), may be a good place to look. That stock offers a yield of over 4% and while the long-term future of oil may be questionable, even in a weak economy people have to drive, and demand for oil has a high floor as a result.

Overall, this is a time to reduce the risk in your portfolio, but to stay invested. There is always uncertainty about the future, but when those who are paid to have an opinion -- like corporate CEOs, economists, and institutional traders and investors -- profess themselves to be uncertain, it is a time for caution, not heroics.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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