We are clearly in the midst of a recession.

In 2022, the S&P 500 peaked in April, again in August, and a third time in November.

But its all-time high was in November of 2021.  Each of the peaks in April, August, and November of 2022 was lower than the prior peaks.  Whether you look at the valleys or the peaks, or any other kind of average, the stock market has been in decline for a year.  

Blame it on the inflationary spending of President Biden and Congressional Democrats, or the Russia-Ukraine war (which only started February 20th), or the actions of the Fed – and all three have had an impact to some degree – or whatever other factor(s) you choose.  But the U.S. economy is in a decline.

And since most of the world’s finances are intertwined with America’s, America is taking the rest of the world with it.  

To paraphrase the old saying “All roads lead to Rome”, it is not unreasonable to say, “All financial roads lead to the U.S.”  Compared to the economies of the world’s other countries, America’s economy is so big, so far-reaching, and comparatively so unrestricted (notably, vs. China!) that some Americans are likely to be involved in almost any given transaction, either directly, indirectly, or in a consulting or supportive role.

As an investor watching the market generally declining, what should you do?

Most importantly, continue contributing money into your 401k.  That is never more important than during a market decline.  Think of it as buying items on sale – buying something at a nice discount.  The money you contribute now, as the stock market heads downward, will serve as the seed money for greater growth when the economy starts to recover.  

When will the market recover?  Some say late in 2023, others say in 2024.  It all depends on what actions the Fed takes.

For now, put that money into the most conservative mutual funds your 401k offers:  the money market fund, the bond fund(s), or whatever similar options the broker offers.  Conserve your value.

Stay aware of how the market is doing.  Watch the market; take note of what is going on.  Do your research.

When the market reaches the bottom, move that money into the most aggressive funds.  If a portion of your 401k is vested, consider moving it out of your 401k and into an IRA, where you can invest in particular stocks.  

How do you know when the market has reached bottom?  That is a difficult assessment, even for the “experts”.  You will see opposing opinions by pundits almost daily.  When you think the time is right, move a fraction of your investments out of the conservative funds or stocks into something you have been following; something your research shows would be a good investment, and which appears to be on the upswing.  

Not all stocks will start climbing upwards at the same time.  If you monitor half a dozen different companies all in different business areas, they will return to growth at different times.  Be patient.  

COMPARE WITHIN BUSINESS AREAS

Another alternative is to watch a dozen companies, two each in six different business areas.  Within a business area, some companies will do better than others.  Compare the two companies in each area against each other.  

Read the news:  find out why the stock of each is reacting differently compared to the other.  Do the research:  what do their respective Executive Teams look like?  What does the CEO say about the recession, and the direction they are taking the company?  What are their P/E (see the February 2022 Investors Column about P/Es) ratios?  How close is each P/E to the average of 17?  How did each company do in previous upturns – i.e., in April, August, and November of this 2022?

A couple weeks to a month after your first (re)investment of a fraction of your funds into something more aggressive, review how the market and your investment choices have performed.  If it still looks like the economy is on the road to recovery – or at least has held steady, with some hint of upswing – invest a second fraction.  Then watch for another similar period; make new assessments.  If they still indicate to you that the economy has begun its slow climb upwards, revise yet a further fraction of your investments accordingly.

Rule of thumb

A fellow investor once made the observation, “When the market hits a peak or a bottom, it will usually start to make its turn in the opposite direction three times.  The first two times will be only temporary; the market will go back to something close to the original peak or bottom.  The third time will be the true beginning of its turn in the other direction.”  

Like any other indicator, there is no guarantee that what that investor observed will always be true.  But it is one more factor to consider when making your assessment of performance of the stock market, or of any given company.

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