Trade The Journey

Trade The Journey


Top Investment Strategies for Current Market Conditions

Top Investment strategies for Current Market Conditions

Investment involves assessing current market conditions and the condition of the market in the future. When I think about investing, I think about the research process I undergo when purchasing a major item. Whether it’s a car, a house, or exercise equipment I go through the same process. I do my research and assess where the price of the item is and if the price is worth the purchase.

Can I get a better deal? What’s the top company selling the product within the product category? What are consumers saying about the product? Do I need this product right now or in the future? Is the product worth the price?

All of this information helps me assess whether the product is worth purchasing. It’s the same research process I use when purchasing a stock for long-term investment. It’s often said that most people don’t invest the same time involved in choosing a stock for investment as they do for major purchases like a home or car.

The economy goes through ebbs and flows which is known as the business cycle. After the Pandemic, the economy expanded as people left the solitude of their homes in search of products and services to make up for the lost time. Companies that did well during the Pandemic included companies like Peleton, Doordash, Grubhub and Zoom which catered to consumers that were working, eating, and exercising from home.

The economy enjoyed an expansionary period that induced companies to stock up on supplies and labor, which wreaked havoc on the supply chain. People began working from home during the Pandemic and once the pandemic subsided, they wanted to keep the same perks. Companies struggled to find labor to meet demand and began to raise offering wages and bend to some of the employees demands like a hybrid schedule.

This expansionary period produced rising prices due to many factors like strained supply chains, competition for skilled labor, and consumer flush with cash due to the government’s distribution of money to help people suffering from the effects of the Pandemic. Companies that did well when the economy reopened included companies like energy companies, Mastercard, Booking Holdings, retailers that sold nondurable & durable goods and companies providing services.

The Federal reserve assured the markets and people that inflation would subside, and that inflation was transitory. As time went on, inflation remained, and the higher prices never subsided which induced the Fed to begin raising rates at the fastest pace in history. The economy was at risk of sticky inflation situation in which higher prices remained higher for longer than healthy for the economy.

Crude Oil shot up to over $100 a barrel and the dollar began to strengthen as the Fed hiked rates wreaking havoc on companies that did business internationally. In the midst of this, Russia invaded Ukraine which caused energy and other commodities to rise in price.

Inflation wasn’t just a US problem, it was a global problem and countries around the world began to raise rates not only to fight inflation but to remedy the widening yield differential due to the Fed raising rates.

The market theme centered on inflation and the rising possibility of a global recession. The yield curve which is the spread between the two-year yield and then the yield curve inverted, which signaled that challenging economic times could be ahead. The yield curve remains inverted at the 2-10 yield and the Feds preferred metric, 3-month treasury bill and ten yield.

Further affecting the Global economic environment, was China’s covid zero-tolerance policy which affected global supply and demand further affecting prices.

This is the short-term picture of what has transpired thus far, which didn’t cover the debt debacle in Europe or the collapse of FTX.

So how does an investor navigate the current market conditions?

 The short answer is to maintain a flexible market outlook, evolving as the economy and the market changes. Recessions fears remain although the market is convinced that the Fed may be able to engineer a soft landing, narrowly avoiding a recession.

That remains to be seen and an investor should prepare for multiple scenarios. Developing multiple scenarios involves using your imagination to determine how you can respond to each scenario.

Here are some of the scenarios I envision strategies for market conditions:

  • The US economy narrowly avoids a recession but faces slower growth.
  • The US economy heads into a recession along with the rest of the world.
  • Higher rates remain high for longer, choking growth.
  • The US enters a cold war with China. Deglobalization is the new way of life.
  • Russia’s war in Ukraine escalates.
  • China demand comes back online contributing to inflation reigniting.

Judging by the recent economic reports, the economy seems to be slowing with higher materials and supplies cost with a consumer whose discretionary income is dwindling. McDonald’s is thriving and Amazon is struggling to improve sales in its online store.

As you can see from the graph, the stock market leads the economy. According to a report on MarketWatch, the stock market has led recessions by close to eight months in most of the major recessions, we have had since 1950.

Recently the market has recovered from the lows made last October and has continued its trend upwards. The Fed’s recent rate announcement and press conference lent support for the bull rally. With companies foreshadowing a slowdown in the pace of economic growth and consumer spending shifting to cheaper alternatives, a slowdown is likely coming in the second half of this year. This is just my opinion.

Being that the Fed will keep rates higher, this will force companies to make moves to improve their margins like scaling back on hiring, capital improvement projects, and taking on less debt. So what are some moves you can begin making now in preparation for the recovery and the next bull rally?

The first thing I suggest is coming up with a hypothesis of where we are in the economy. My personal opinion is that the economy is in the early stages of a minor recession.

It looks like we may have bottomed back in October as most of the indices are showing the 50 SMA either crossing or in the process of crossing the 200 SMA.

Dow Jones: 50 SMA crossed the 200 SMA last December.

S&P 500: 50 SMA is in the process of crossing the 200 SMA.

Russell 2000: 50 SMA recently crossed the 200 SMA.

Nasdaq: 50 SMA still has some ground to make up before crossing the 200 SMA.

The short-term trends of the indices have turned bullish as risk sentiment has returned to the market. Bonds a leading indicator of stock performance have reversed their bearish trend.

There are many ways to invest in the market such as buying to hold, dollar-cost average, buying value stocks, buying growth stocks, and swing trading.

If you don’t have a large sum of cash laying around to invest, perhaps the best strategy might be dollar-cost averaging. This is my preferred strategy. Typically, I invest a small amount in companies I expected to perform well in the next few years.

According to the chart above, if we are in the stages of an early bull market, Financials, and Transportation would be industries to add to your research.

But what if we are in the middle stages of a bear market and we still have further levels below to test, what actions should we take?

Perhaps the best strategy might be looking into growth strategies while keeping a close eye on the Fed rates, commodities, and bond yields so you can better time your entry. Or you could focus on companies that you believe are undervalued during this period, which is known as value investing.

Commodities especially gold serve as a leading indicator of inflation. Perhaps looking at tech companies facing challenging times with their margins might be an area worth adding to your research list.

Now might be a challenging time to be actively investing especially with opinions varying between the beginning stages of a recession or early recovery.

If you are unsure of the strategy that might be best, you could choose to invest in an index fund, which mirrors an index like the S&P 500. While this strategy might not a provide return like choosing a stock, it still will deliver over time.

With inflation proving to be stickier than expected, leaving your money in a non-interest-bearing account is not a good decision.  With 1-month, 3-month, 6-month, and 12-month treasuries offering rates above 4% it might not be a bad idea to put your money into treasuries and wait out the possible recession. If the Fed is able to engineer a soft-landing, at least your capital earns a rate of return near the inflation rate.

The only problem with this strategy is that you’ll miss out on the above-average returns early investors were able to capture by actively investing through the market turbulence. I think your strategy depends on the amount of time you have available to research potential investments.

It might be worth waiting to see if this indeed the start of a stock market recovery or just a bull trap setting the stage for another downtrend.



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