Prudent Investing During Volatile Times

Families need financial protection as well as spiritual protection in hard times.

If you have read my book, you know that I encourage families to invest. Owning productive assets is beneficial for family life because it enables families to weather all four seasons of life.

Photo by Maxim Hopman on Unsplash

The last week has been brutal for stock market investors, and we are likely not out of the woods yet. I have completely exited the stock market and am waiting on the sidelines in cash, but now what? It could be a year or more before trade negotiations are worked out and the stock market gets back to “normal.”

On Friday the price of the S&P 500 index dropped over 5%, so on Monday I sold the few stocks I had remaining, activating my 5% “fractal wave” rule, which you can read about in my book. The market tried to rebound today, but I am afraid it will be short lived. I will wait several months now before I attempt to reenter in my retirement accounts. There is more going on in the market than just a trade war. This is my take on it:

· Stock valuations have been very high by historical measures and remain high, despite the recent sell-off. If it wasn’t tariffs, something else would have eventually triggered this price correction. That is the nature of the stock market, it goes up and it goes down, and nobody knows how far up or how far down it will go.

· Our debt to GDP ratio is unsustainable. Trump has said he wants to use tariff dollars to pay down the public debt. I support paying off the public debt, but time will tell whether his plan will work. If tariffs push the world economy into recession, this plan might backfire. China holds a good portion of our public debt and who knows how things will escalate with China. For this reason, I also do not own any treasury bonds, at this time.

· Manufacturing. 4 years may not be enough time to reverse the 60-year trend of offshore manufacturing. Many U.S. companies will likely move their manufacturing to countries that have lower tariffs, raise prices, and wait to see what happens in a few years.

· Inflation. The big killer in all this will be inflation. Because of 10%-25% tariffs, we will likely see 10%-25% inflation in the coming year. That is a brutal reality considering the stock market is not likely to finish correcting itself any time soon. This is called stagflation—when the market stagnates, and inflation rises.

· Natural Disasters, Wars, and Foul Play. If we don’t think God is trying to get our attention, then we are doomed to suffer for a long time, until we do acknowledge His Hand, accept His corrections, and get back on the “straight and narrow.”

What if We Have a Recession? What are good “Recession Proof” Investments?

Since it could be a year or more before a bull market returns, I have turned my mind to real estate. I own one rental property with my brother and son, but real estate is something they know more about than I do. It is something I intend to study more closely in the coming months. It is not a good idea to be sitting on cash. It is too easy to spend cash, which is not the purpose of owning capital. Everyone needs a roof over their head, in good times or in bad times. Housing is a basic, universal need. Thus, the real estate option.

And if you lose your job during a recession, consider starting your own business. A business is often the best possible investment. Find a need and meet it. There are many businesses that do well during recessions. If you are young and eager, try the trades!

In the meantime, beware of “bear traps” in the stock market. A bear trap is when a bear market has a short-term rally before falling again. Markets don’t go straight up or straight down. I have a non-discretionary rule for reentering the market. I wait until the price of the S&P 500 remains above its 200-day moving average for a full calendar month before reentry.

As of this writing the S&P 500 index is at 5,059 which is 12% below its 200-day moving average and 18% below its high of 6,147, and I would not be surprised to see it go to 4,000 before October. That would be a reasonable correction considering the current P/E valuations; and if we are in a year-end recession and Trump is sticking to the Trade War, the index could go lower than that. 4,000 would be a 35% correction. A 35% drawdown requires a 54% recovery, which could take 5 years to get back to 6,000 again, in an average market.

I am okay with waiting on the sidelines in cash, for a few months at least, to see what happens. In the meantime, I am going to look into other ways of generating cash flow.

This stock market correction is likely a divine correction as well as a natural one. For the Fathers, divine chastisement is not opposed to God's mercy but is an expression of it. Hardships due to sin are pedagogical, not cruel; they serve to awaken the conscience, purify the soul, and lead sinners back to the Church. In this view, punishment is medicinal, not merely retributive.

If we take this stock market correction as a divine correction, and learn from it, then we will be the wiser and more virtuous on the other side. I don’t know what God is trying to teach you, but I think He wants to teach me about trust, providence, and real estate. 😊

Take care!