As expected, the Federal Reserve raised the federal funds rate by another 75 basis points yesterday, boosting them to a range of 3.75% to 4% after they started the year at near zero. Short-term interest rates are rising at breakneck speeds, and the Fed plans to raise them even further in the coming months. How can we, as investors, continue to combat the effects of skyrocketing interest rates? Here are five stock market investing tips for this kind of unique environment.
5 Stock Market Investing Tips to Help Fight the Fed
- Watch, Don’t Listen. Hanging on every word Jerome Powell and company say on a week-to-week or even day-to-day basis will have you twisted in knots. One day their comments will sound pessimistic and hawkish and stocks will fall 2-3%, tempting you to sell. The next day, they’ll backtrack and sound almost dovish, prompting markets to rebound – and tempting you to buy everything back you just sold! Don’t get caught listening to all that noise. Instead, watch the charts. If they start to go up for more than a few days – as they did in October, finally – then you can start adding to your portfolio if you have some cash on hand. If the latest interest rate hike sends stocks into retreat mode again, then maybe keep some of that powder dry. Speaking of powder…
- Cash Is a Position. Mike Cintolo, our resident market timing expert (really one of the very best in the industry at it), has been at least 80% in cash for the past couple months in his Cabot Growth Investor. My Cabot Stock of the Week advisory, which plucks the best stocks from among nine other Cabot investment newsletters, currently recommends 14 out of a maximum of 20 stocks – effectively a 30% cash position, down from 40% a few weeks ago. Whether you have 30% or 80% of your own portfolio in cash, it’s important to have at least some of your investment dollars sitting on the sidelines in bear markets like this one, waiting to be deployed judiciously when the next bull market arrives (and it will arrive).
- Remember that Markets Are Forward-Looking. It feels much longer, but the Fed has only been raising rates for eight months, dating back to early March. During that time, the S&P 500 has fallen about 12.5%. But here’s the thing: Stocks started falling two months before rates started rising (longer than that, in the case of growth stocks), and have been recovering for the past month, even though most economists expected the Fed to raise rates another 75 basis points on Wednesday. Similarly, economists now expect the Fed to continue raising rates for another two or three months, until they reach close to 5%, and then stop. If the Fed follows that script, stocks will likely continue their recent recovery. Any deviation from that script, however – i.e. if the Fed raises rates beyond 5% and deeper into 2023 as they struggle to tame inflation – and that’s when we could experience yet another significant market pullback.
- Stick to Your System. Stock market investing requires having a certain set of personal rules or guidelines. For example, if a stock falls a certain percentage, you sell, no matter how much you like the company or the story. For us, the percentage varies from analyst to analyst – I try and limit losses to no more than 15-20%; other Cabot experts have longer leashes (25-30%, or more), some have tighter leashes (10-12%). Similarly, you buy when a stock meets certain criteria – it breaks above its 200-day moving average; the company’s revenues are accelerating; it hired a new CEO, etc. Regardless of what your personal stock-buying criteria are, you stick to them in good times and bad. So no matter how bleak things have looked or could look for stocks in the coming months, you stay disciplined and stick with your system – even if it means being 80% in cash.
- Pay Attention to History. As my recently retired colleague was fond of saying, be an optimist. You have to be optimistic about the future of the stock market in order to make money in it. And there’s more than a century’s worth of reasons to be optimistic: Over time, stocks go up, anywhere from 7-9% annually on average. In the moment, bear markets like this feel like they may never end; but they always do. Eventually, the next bull market rally will arrive, and that’s when the real money is made. Chances are, the next rally may arrive sooner than you think; in fact, in midterm years like this one, stocks are up an average of 32% from that year’s bottom in the 12 months that follow, according to Ryan Detrick of Carson Group. In fact, the S&P has been up every time dating back to 1950, with the minimum 12-month gain being 8.7% in 2014. True to form, the S&P is up 7.2% from its October 12 bottom already. There may be more sharp pullbacks on the horizon, but odds are we’re closer to the end of this bear market than the beginning.
The Bottom Line
Stock market investing is never easy, but hopefully, the above tips can simplify things a bit for you in these unpredictable and chaotic times. If you need a little extra help, or simply want to know the names of the best stocks our analysts suggest buying right now, I highly encourage you to subscribe to my Cabot Stock of Week advisory, which every Monday recommends a new stock that’s already received a stamp of approval by a Cabot analyst.