The “buy the dip” financial news teleprompter readers and the 30-year-old portfolio managers who have never seen a market crash are suddenly starting to get very quiet, and cannot be found. Market veterans and “hey boomer” professionals have seen this show before. Back in 1987, the Dow Jones industrial average plunged a stunning 22% in one day. The equivalent today would be a drop on the venerable index of almost 6,750 points.
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During the period from 1929 to 1932, the stock market plummeted a stunning 83%, and many people lost everything. That debacle caused the Great Depression, which really only ended when we entered World War II in 1941.

In the years from 2007 to 2009, during the height of the mortgage and real estate collapse, one that brought us dangerously close to another depression, the market dropped a huge 57%. When stocks finally bottomed at an ominous intraday low of 666 on the S&P 500 on March 9, 2009, we put in the floor for the longest bull market in history. That bull market came to an end in January of 2022.

So where do we stand now? Very possibly on the precipice of another much larger decline after a big bear market rally to start 2023. If we break the market lows of 3,585 on big volume that was set back in October, we could be on our way to 3,100 to 3,200 on the S&P 500. That is an additional 23% from where we are trading now.

This week’s increase in both the consumer and producer price index data from January, and the huge jobs report from earlier in February, have set the table for Federal Reserve Chair Jerome Powell to increase rates by 25 basis points in March, May and July. In addition, it is very possible the terminal or final funds rate could end up being as high as 6% and could very well stay in place until 2024 before any possible Fed pivot.

One positive is that, for the most part, consumers and businesses are in reasonably good financial shape. Stock portfolios and home prices have increased dramatically over the past few years, and the financial system is not teetering on the abyss as happened globally in 2008 when Bear Stearns and Lehman Brothers collapsed and Merrill Lynch had to be bought by Bank of America to avoid a similar fate.

One thing is for sure, the path of least resistance appears to be downward, and trying to “fight the Fed” that has to continue to raise rates to slow the worst inflation in over 40 years is a losing battle. There are some important actions for investors to consider now, as they may have to prepare for the worst.

• Do not continue trying to catch the proverbial falling knife. Instead, it may make sense to match current losses against gains, even if they are short-term in nature, to help build up a cash supply. The proverbial dry powder may come in handy down the road.
• If at all possible, immediately close out any positions on margin. For individual investors to use margin loans to buy more stock is a bad plan when times are good, especially when those margin positions are high volatility momentum stocks.

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• If you have the good fortune to come into a windfall, like an inheritance or something similar, think about real estate. While mortgage rates have increased over the past year, the 30-year fixed rate had risen as high as 7.25% but has fallen back to 6.18% for a 30-year FHA mortgage. While still reasonable on a historic basis, it is the highest since 2008. Owning cash-generating rental property is an idea that makes sense now.
• If you do indeed need to look for stock ideas, look at extremely conservative ones, those that are not affected as badly by even the worst-case scenarios. In other words, companies that provide goods and services that are needed all the time, like utilities, telecommunications companies, consumer staples, and real estate investment trusts.
• Sell high-volatility stocks and look at the short end of the Treasury market. The two-year note, like all Treasury debt, is guaranteed by the full faith and credit of the United States and yields a stunning 4.65%. One-year certificates of deposit yield as high as 4.60% as well, and money market savings accounts, which are FDIC insured up to $250,000 yield anywhere from 3.4% to 4.0% with daily liquidity.

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The 13-year bull market was a blessing that may end up being a curse. There were numerous drops and corrections along the way. The fourth quarter of 2018 was a good example, when over a three-month period the S&P 500 declined 18% on an intraday trading basis. Last year was the worst one for the stock market since 2008, and while 2023 may not be that bad, a precipitous drop is becoming increasingly possible.

Remember that even the most difficult events in human history and investing have been overcome eventually. Whether it be health-care-related, war-related, foreign geopolitical or domestic troubles, or any other issues that have combined to cause market sell-offs, time tends to heal most wounds.

With COVID-19 largely in the rearview mirror, the economy in reasonably good shape at least for now, and the Federal Reserve finally doing what it should have done when it started raising rates in 2018, at least some of the carnage is closer to an end. However, the rally to start this year was likely of the bear market variety, and some feel we could be headed for a 20% or greater drop. So, it makes sense for investors to take advantage of the recent increase in stock prices and shift to higher and safer ground.

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