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Small investors: Where to hide in the current market downturn?

Written By | Oct 28, 2018

WASHINGTON.  In a swift market downdraft like the one we’re in, it’s tough to make a smart investment call. If small investors – like you and I – didn’t manage to dump low-performing stocks from their portfolios early on in this decline, it’s probably a little late now. Dumping half your declining portfolio into the severe, still-ongoing October 2018 market downturn right now would likely make matters worse for most small investors, at least in the intermediate term.

Plus, if we get some snapback this week, you might take an even worse beating by selling stocks now, only to see them rally in a day or two. Read our previous two articles on this topic here and here.

So let’s park our dump trucks for now, and think our end-of-month strategies through.

Small investors: What to do in this current market downturn?

Presumably, we’re not yet ready for a secular bear market – pending the still dubious reaction to whatever happens in America’s voting booths next month. Which means that the secular bull will rise again and bail us out of our misery soon with a big time Santa Claus Rally to end 2018.




But again, it’s probably too early to dump stocks at or near what’s likely the low point. However, it’s also unappealing to start buying loads of bargain-basement priced shares right now. Those bargains might even get better later this week.

Reading the tea leaves

Here’s an observation excerpted from internal guidance provided by Charles Schwab, the brokerage firm I’ve used for decades. (Note: That’s not necessarily an endorsement of Schwab, BTW, and I don’t get paid for writng this.)

“Bear markets most commonly occur with economic recessions, and at present there have been few signs that a recession is imminent. In fact, a primary contributor to the recent stock weakness has been an offshoot of strong economic growth: rising interest rates. The Federal Reserve has been raising rates since late 2015 as the economy has grown, and is widely expected to do so again in December. While some may be concerned that the Fed will raise rates too much and too fast and tip the economy into recession, the fact remains that the Fed is on a rate-tightening path because the economy is strong. On the other hand, markets have been rattled by several weaker-than-expected corporate earnings reports for the third quarter, as well as concerns about global economic weakness and geopolitical tensions. It’s extremely difficult to pinpoint the exact moment a market is about to turn.”

Bear markets and bull markets over the years. Chart via Charles Schwab member site.

Correction vs Bear

Pinpointing an exact market moment is difficult. So I plan to deal with this situation conservatively. While it’s hard to be patient when fear and loathing run strong, history tells us to avoid panicking out of most very sick-looking positions we’re holding.

I believe we’re not in bear market territory yet and won’t be, at least for the next couple of quarters. Therefore, something should arrive to rescue many stocks fairly soon, even if it’s only a very good dead cat bounce. However, all investors, including me, should keep in mind that those bear market predictions the perma-bears are always making will indeed come true some day. We just don’t know when.

A Sunday posting at CNBC.com provides some useful historical information on bear market length and duration.

“The average correction for the S&P 500 since World War II lasts four months and sees equities slide 13 percent before bottoming, according to analysis at Goldman Sachs and CNBC.

“Bear markets — defined as a 20 percent fall in stocks — average a loss of 30.4 percent and lasts 13 months; it takes stocks 21.9 months on average to recover….

“‘It’s a bad sign that oversold markets not bouncing,’ Michael Hartnett, Bank of America Merrill Lynch’s chief investment strategist wrote. ‘The inability of oversold markets to bounce suggests investors worried by either systemic financial market event or recession.'”

Take your pick. Your portfolio’s final 2018 return percentage may be in the balance.



Choose your strategy and finding a place to “go hide”

As we’ve stated many times in these columns, we’re not in the business of making recommendations. But here’s a brief summary of my current ideas, which, right now, are few in number, pending better evidence. Or Monday’s trading action.

I worked as a Great Lakes merchant mariner to earn college tuition I picked up some useful terminology there that’s proved useful outside that industry. On the Great Lakes and the open seas, when the captain spots weather reports indicating incoming severe weather and high seas, he’ll often plot a temporary course. It will take him into a sheltering cove or deep harbor. Here, the ship can drop anchor and ride out the storm with some protection rather than toughing it out on the open seas. That’s called “finding a place to go hide.”

And that’s what small investors need to do until the current market storm blows over. We all need to go hide.

A sector where we could hide

If you have cash on the sidelines, as I do, it’s probably best to keep it there for now. Again, bargain hunting right this moment could be premature and lead to more losses.

Both CFRA (the successor organization to Standard & Poor’s spun-off research entity) and chartmaster Carl Swenlin have read the recent technicals of this market. If markets calm down, both services think the Utilities and Consumer Durables sectors as still safe to invest in. Aside from cash, in a stormy market, they are classic places to go hide.

In addition, CFRA has just changed its recommendation on the S&P Utility Sector from Hold to Overweight, a mushier term for “Buy.” So a timely purchase or two here sometime next week could bear early fruit if we get the selling out of the market’s system.

RELATIVELY safe names to consider

If that’s the case, Exelon (EXC) and Clearway Energy Class A shares (CWEN/A), a REIT-like utility stock with a current, fat dividend of 6.66 percent – could be decent buys here if one happens to need a bit of dividend income until the current storm clouds clear.

Exelon, BTW, for our Washington D.C. metro area readers, is the company that acquired beleaguered local electric utility PEPCO. So far, they seem to be bringing that formerly high-yielding but clumsy utility into more consumer reliable territory. EXC, for its part, currently yields 3.16 percent while holders wait for further price improvements in the stock.

I do hold a small position in RHS, the thinly traded Invesco S&P 500 Equal Weight Consumer Staples ETF. That, for now, covers my portfolio’s exposure to the only other currently “safe” sector. It’s still stuck in a modest amount of red ink, however. I don’t love any currently recommended stocks in this sector either. I think I’ll just hold onto this one and avoid adding to it for now.

In addition, I invested a rather substantial portion of my large portfolio in high-yielding preferred stocks some time ago. These have remained stable. Bought mainly for their yield, preferred stocks can still be an excellent port in this storm. But their situation is slightly more complex with regard to the Fed. The yields on most preferred stocks are fixed. In a rising interest rate environment like ours, this can lead to some price erosion in preferreds.

In conclusion

Aside from these minimal ideas, September / October is my most un-favorite time of the investing year. It’s a time when “watchful waiting,” rather than action, is likely the wisest course.

Back with updates, if and when they occur. Have a good Sunday.

— Headline image via Pixabay.com. Public domain, CC 0.0 license.

 

Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17