Jane Bryant Quinn—As Business Growth Slows, Consider Investing Strategy

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Is this the bottom of the market? Is it time to step in and buy stocks? No one knows, so commentators cheerfully fill the void with guesses of their own.

But good investors don’t look for yes/no replies to futile questions. Instead, you need a strategy for investing in uncertain times. “Uncertain” describes investing at any time, but you notice it more when stocks have dropped.

So, here goes.

It’s a fact, not a guess, that business growth is slowing down. Most economists expect either a “soft landing” (where growth continues but at a moderate pace) or a “hard landing” (growth slows to a crawl).

Only a very few are forecasting recession (that’s a shrinking economy, with the crunch lasting for two quarters or more).

In any of these scenarios, interest rates will eventually fall and unemployment will go up. Unemployment currently stands at 3.9 percent. A hard landing might take it over 5 percent still relatively low.

Nevertheless, a hard landing could feel like a recession, even though it’s not, says Allen Sinai, chief global economist for Primark Decision Economics.

Another fact stock prices reflect what investors expect to happen (whether it actually happens or not). Here’s the typical relationship between the economy and stocks, during an economic cycle:

Stage One (last spring) The economy is running full blast. Interest rates have been rising for awhile without putting a dent in optimism. Stocks start to drop. Investors enthusiastically buy the dip.

Stage Two (this summer) Business growth tops out and declines. High interest rates level out and drop a bit. Stocks stage occasional, strong rallies and investors buy. Then the market drops again.

Stage Three (probably not there yet, but who knows?) Business is in the dumps, either in recession or near the low point of a slowdown cycle. Interest rates fall. Stocks rally strongly, but investors worry that it’s just another fake-out. So they sit on the sidelines or sell.

Stage Four The slowdown (or recession) ends. Business improves, interest rates stay low and stocks continue to rise. At this point, the average market-timing investor starts to buy again.

No one blows a whistle when each period ends, and the periods usually aren’t as neat as I’ve pictured them here. What’s more, we haven’t had a classic declining market in the major indexes.

Both the Dow Jones Industrial Average and the S & P; 500 have endured a bumpy year. At this writing, however, they’re both down only 7 percent from where they opened last January.

Individual stocks are another matter. Many value stocks got creamed last year and early this year, while growth stocks soared. Since the tech bubble broke last spring, growth stocks have stumbled while value stocks gained.

Then there’s the Nasdaq, whose rocketing, blood-pounding techs and dot-coms defined the boom. Since March, the average has plunged by about 45 percent, erasing all the gains of the past 16 months. The once-hot bubble stocks are down 70 percent or more.

The Nasdaq is still expensive, compared with the S & P; 500, says Martin Barnes, managing editor of the Bank Credit Analyst in Montreal.

Many leading tech companies are still expensive too, relative to their probable future earnings growth. So the market bubble may not have been extinguished yet.

To the extent that investors have not yet accepted this change, tech stocks are still too expensive, Sinai says.

Of course, he could be wrong. New growth and a new bull market could be right around the corner. To manage the uncertainty:

1. If you have a lump sum reserved for stocks, invest it gradually, over the next few months. Keep making regular payments into the mutual funds in your 401(k). That way, you get stocks cheaper if the market drops. If it rises, you at least protect yourself.

2. Diversify across the entire stock market, with mutual funds. Trying to pick a few stocks leads to owning a Lucent at the wrong time.

3. Include bond mutual funds in your mix. When interest rates fall, they rise.

Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.

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