Investors have questions about inflation, the possibility of a recession
Paul Fain, CFP®
What is on the mind of investors this month? Mostly concern. There is much negative chatter about inflation, recession and a double-dip bear market. Here are some of the frequent investor questions that I am hearing:
∎ “Is the bear market over?” Probably not. While the Fed is raising interest rates (to fight inflation), it likely means more downward pressure on the stock market. Disclosure: trying to predict the stock market’s direction tends to make astrology look reputable. Fortunately, bear markets end and companies survive the downturns by adapting to new realities. As evidence, consider the upward march of the Dow Jones Industrial Average (DJIA) over decades. The DJIA was 616 in 1975. It was 30,898 a few days ago.
∎ “I’ve got some cash. Should I invest it now or wait for more favorable conditions?” With history as a guide, if you have a long-term time horizon (five-plus years), there is never a bad time to invest in the markets. Indeed, wealth accumulators should be aggressive while stocks are on sale. If you are apprehensive, dollar-cost-average over the next six to 12 months.
∎ “Where should I invest?” Risk-based diversification still makes a ton of sense, but tweaks here and there are reasonable. For example, add to your international holdings. Large overseas economies are faring better than many had feared. Looking ahead, the International Monetary Fund, a widely watched global think tank, recently released projections for economic growth that showed Europe and Japan outpacing the U.S. in the coming years. High-quality bonds tend to be an excellent stable hedge for stocks in a recessionary environment. High-dividend-paying U.S. stock mutual funds can help cushion the downside should the economy and corporate earnings continue to slow. Diversify with companies that offer products and services that consumers will continue to buy regardless of what’s happening in the economy.
∎ “Is a recession inevitable?” After a brief uptick, much of the economic data has turned sour again, with bad housing data and a significant contraction in business activity. According to a general definition of recession − two consecutive quarters of negative gross domestic product − the U.S. has already entered a recession. The economic outlook remains hazy, so patience is still needed.
∎ “All this makes my brain hurt. Should I just sell out and buy gold?” Selling now means that you potentially lock in the losses we have already seen this year. Don’t do it unless you absolutely need to shore up your liquid reserves. Gold has underperformed the U.S. stock market over the long term. And this year, gold is nearly in its own bear market during a time when it should be holding its value. So gold seems to be failing as an inflation hedge. If worry and cable TV commercials are driving you toward a radical shift into gold, consider investing in a therapist instead − it might yield a better return.
All said, there’s an old saying attributed to Danish physicist Neils Bohr: “Predictions are difficult, especially about the future.” My confidence is that the market downturn will eventually end followed by new heights, inflation will ease, and the economy will move forward propelled by human ingenuity.
This article originally appeared in Knoxville News Sentinel online September 30, 2022.