FED raises rates & diversification in bear markets

Nate Crosby | Sep 27, 2022

Some highlights from the latest Jerome Powell meeting

Even through the wishy-washy language and sterile choice of words, it’s clear that the Fed plans for the economy to incur a sustained period of lower-than-normal growth to bring inflation down. Rates will have to go higher, and the Fed still projects we may not reach the inflation goal until 2025. We’re starting to see the housing market begin to correct itself and the 30-year mortgage rates of over 6% certainly aren’t slowing down the shift. Unemployment projections are around 3.7% now with an estimated 4.4% by the end of next year. That’s a lot of jobs that will be lost in the coming 12 months.

Stress can do weird things

Imagine you’re leaving a college football game, and someone backs into your car in the parking lot. Obviously, no one is thrilled about this – including the at-fault person – but accidents happen. Now imagine instead of simply exchanging insurance information or perhaps calling the police to help with the situation, instead, you assault the person and their vehicle. I wish we had made that story up and honestly Doug Ramsey (COO of Beyond Meat) likely does as well – but it was in the headlines this week. Now take a look at Beyond Meat’s earnings and perhaps it’s not too much of a leap to assume stress may be playing a role.

Markets are selling off – again – today (September 23)

For our individual stockholders out there, it’s extremely important to stay the course when day after day all you see is red. It’s exhausting – we get it, trust us – but when the market is relentless, do yourself a favor and don’t let it stress you out … too much. From the book ‘100 to 1 in the stock market’ (Thomas Phelps), a key point is to never make an investment action based on non-investment data. Think about that. It makes a lot of sense, doesn’t it? It’s not the most sound strategy if you are selling a stock just because it decreased or if your stock isn’t moving and others appear to be.

Here's some (better) advice for riding the storm until you see the green:

Manage your risk by making sure you are diversified
Align your investments with your risk tolerance
When buying a stock, look at things other than just price movement, be sure to look at not only PE but also PEG ratio and free cash flow
- Side note: what exactly is PE? We talk about it a lot on our podcast! PE is the price per share divided by earnings per share. A lower ratio means there’s a chance you’re getting a deal on it, while a higher number signifies the stock may be priced too high or it could mean the market values it higher overall.
When evaluating a stock – always look at it relative to the sector it falls within, not just against the S&P 500.

The bottom line is you may, in fact, feel your stock’s price no longer justifies what the company is doing, and that’s okay. Your reason for selling should be because the reason for buying has changed – not because the price isn’t moving.

Remember, in a bear market the short-term investors will end up selling and taking a loss. It’s the long-term investors that buy and hold and will eventually (hopefully) see gains.

Please note: This content is not a direct recommendation for investment. Investing involves risk including the potential loss of principal. Not all investments are suitable for all people. Crosby Advisory Group, LLC is a registered investment advisor in Ohio, Florida, and Texas.

FED raises rates & diversification in bear markets