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The “Buy the Dip” financial news teleprompter readers and the 30-year-old portfolio managers who have never seen a market crash are always insisting that stocks are going to the moon. Market veterans and “Hey Boomer” professionals have seen this show before. In 1987, the DJIA plunged by a stunning 22% in a single day. Today, a comparable drop in the venerable index would be 10,600 points.
From 2007 to 2009, during the height of the mortgage and real estate collapse, which brought us dangerously close to another depression, the market dropped a massive 57%. When the S&P 500 finally bottomed at an ominous intraday low of 666 on March 9th, 2009, we set the floor for the longest bull market in history, which ended in January 2022, and then picked right back up when OpenAI released ChatGPT in November of 2022, and hasn’t looked back since, recording three straight years of double-digit gains for the S&P 500.
So, where do we stand now? We may be on the precipice of a much more significant decline than we have seen since last year, even as all major indices still trade near all-time highs. One positive is that consumers and businesses are generally in reasonably good financial shape. Stock portfolios and home prices have increased dramatically over the last few years, and the economic system isn’t teetering on the abyss as it was globally in 2008 when Bear Stearns and Lehman Brothers collapsed. To avoid a similar fate, Merrill Lynch was bought by Bank of America.
One thing is sure: if inflation rears its head again, the wars in the Middle East and Ukraine escalate, and our massive national debt, approaching $38 trillion, continues to spiral out of control, the path of least resistance will be downward. Additionally, if the AI bubble and private credit chatter intensifies, it could add downside pressure. Investors should consider several crucial items now, as they may need to prepare for the worst, at least in the short term.
Start building a cash stash now:
One positive is that consumers and businesses are generally in reasonably good financial shape. Stock portfolios and home prices have increased dramatically over the last few years, and the economic system isn’t teetering on the abyss as it was globally in 2008. Matching current losses against gains, even if they are short-term, makes sense to help build up a cash supply. The proverbial dry powder may come in handy down the road. High-yield money market savings pay as much as 3.95% and are insured up to $250,000.
Close out any margin positions immediately:
Margin is the money borrowed from a broker to purchase an investment. When times are good, using margin loans to buy more stock is a bad plan for individual investors, especially when those margin positions are high-volatility momentum stocks. If the market collapses, a highly leveraged margin account could be wiped out.
Gold and Silver still make sense:
Gold is the most popular precious metal investment and has been on a strong upward trend over the last few years. As we have recommended for years at 24/7 Wall St., a gold position helps mitigate the downside, and it always makes sense to keep 3%-5% in stock portfolios. One outstanding way to own physical gold is through the SPDR Gold Shares ETF (NYSE: GLD), which is one of the best pure plays on Gold for investors. The fund holds physical gold bullion and a portion of cash. Each share represents one-tenth of an ounce of gold. However, the fund does not pay a dividend.
Make sure investments are reinvested in more shares:
Dividend reinvestment is a great way for investors to grow their wealth steadily. Ensure that all the dividend-paying stock and mutual funds in personal and retirement accounts are coded to reinvest all capital gains and dividends, if possible. This allows you to buy more shares when prices are hit hard. The fourth quarter is half over, and many stocks and funds pay dividends on a calendar quarterly basis; therefore, be sure to check your accounts today.
Real Estate can help:
Buying and owning real estate is a strategic investment that can be both satisfying and lucrative. Consider real estate instead of the stock market if you have the good fortune to come into a windfall, like an inheritance or something similar. While mortgage rates have increased over the last four years, the 30-year fixed rate reached 7.25% at one point. However, it has fallen back to 5.98% for a 30-year FHA mortgage, and while still reasonable on a historical basis, it’s the highest since 2008. Owning a cash-generating, passive-income rental property makes sense now.
U.S. Treasury bonds look great now:
Treasury bonds include a range of debt securities issued and backed by the US government. Sell high-volatility stocks and look at the short end of the Treasury market. The 2-year note, like all Treasury debt, is guaranteed by the full faith and credit of the United States and yields a solid 3.54%. One-year Certificates of Deposit yield as high as 4.05%, gains in the stock market, and money market high-yield savings accounts, FDIC-insured up to $250,000, yield anywhere from 3.50% to 4% with daily liquidity.
One of the funds we highly recommend at 24/7 Wall St. is the SPDR Bloomberg 1-3 Month T-Bill ETF (NYSE: BIL), which currently yields 4.10%. The fund invests substantially all, but at least 80%, of its total assets in the securities comprising the index and in securities that the Adviser determines to have economic characteristics substantially identical to the financial characteristics of the securities comprising the index. The index measures the performance of public obligations of the U.S. Treasury with a remaining maturity of 1 month or more but less than 3 months.
Last but not least….
The Great Crash is primarily associated with October 24, 1929, known as Black Thursday, the day of the most significant stock market sell-off in U.S. history. As a reminder, 2022 was the worst year for the stock market since 2008; however, since November of that year, we have experienced three consecutive years of double-digit gains. Remember that even the most challenging events in human history and investing have eventually been overcome. Whether healthcare-related, war-related, foreign geopolitical, or domestic troubles or other issues that have combined to cause market sell-offs, they ultimately end. It makes sense to take advantage of the recent massive stock price increases and shift to higher, safer ground.
