Not to be a buzz kill, but there’s plenty to suggest a stock market selloff is on the horizon. Federal Reserve Chair Jerome Powell indicated in his recent policy speech at Jackson Hole, Wyo., that the central bank will “use our tools forcefully” to combat rising inflation. That translates to a higher interest rate environment, meaning that deflation may be coming.
Fundamentally, should the Fed aggressively rein in soaring consumer costs, the result would be fewer dollars chasing after more goods. Such an environment would lift the purchasing power of the greenback. Indeed, precedence for this already exists. In the early years of the Great Depression, purchasing power increased by nearly 38%. Therefore, a stock market selloff implies a strengthening currency.
But why would equities decline if the U.S. dollar gains strength? It comes down to the economic incentivization between stasis and kinesis. In an inflationary environment, investors must do something (kinesis) to prevent their wealth from eroding. However, in a deflationary environment, sitting on dollars (stasis) effectively generates a guaranteed positive return.
Understanding this critical context will allow you to better survive a stock market selloff. Below are three points to consider.
Selectivity (or Making Your Rising Dollars Count)
Illustration representing an overvalued market or overvalued stocks. Man floating off a dollar bill holding a money balloon. Overvalue. Overvalued stocks.
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Have you ever noticed that practically every single doom-and-gloom huckster sells the idea of the destruction of the U.S. dollar first before pitching an investment idea (usually gold)? Virtually every market con artist talks about inflation because it forces you to make a decision. Stated differently, if the dollar was truly about to implode, you better do something quick (like buying a newsletter or signing up for a dropshipping course).
On the flip side, did you ever notice that these shameless disinformation peddlers never sell the idea of deflation? It’s for a reason. Under a deflationary environment, the dollar will gain value over time. Therefore, all other things being equal, you are guaranteed a profit simply by doing nothing.
From another angle, should a stock market selloff occur, the catalyst likely stemmed from a deflationary force. If so, investors need to be extremely careful about where and how they put their money to work. Since the dollar will automatically rise in value, any investment opportunity must be so compelling that it’s worth setting aside a guaranteed return in exchange for a potentially robust but not guaranteed profit.
That’s why you need to be extremely prudent – more so than usual – under a stock market selloff. Not coincidentally, this prudence at scale contributes to why true bear markets can be frustratingly lengthy.
Adaptability (or Boring is Good)
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Peruse the internet and you’re likely to come across another type of market huckster: the one that claims the development of a system that can yield absurd profitability with a fantastical rate of success. Further, you may be led in with magic words like “back-tested gains.” Here’s why it’s nonsense.
The huckster may be correct that the underlying system produced substantial gains, but it did so under the prior equities sector paradigm. Should a substantive stock market selloff materialize over the next several months, it’s very possible that the game itself has changed. As mentioned earlier, rather than operating under a framework of dovish monetary policies, the Fed has pivoted to hawkishness.
In economics, that’s the equivalent of a 180. Therefore, investors must be adaptable to this sharp transition. Specifically, rather than growth stocks like Affirm (NASDAQ:AFRM) or Coupang (NYSE:CPNG), investors will want to focus on “boring” names like Progressive (NYSE:PGR) or Duke Energy (NYSE:DUK).
The former two companies may benefit from an inflationary cycle as cheap money incentivizes intriguing business expansion opportunities. However, the latter two are kings of deflation because, in a parsimonious environment, such companies offer indelible services.
Productivity (or Your Boss is Watching You)
Group of colleagues discuss something in an office conference room.
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In an interview with Bloomberg, real estate billionaire Stephen Ross said that during the middle of the pandemic, employers hesitated to lay down the law due to the tight labor market. “But I think as you go into a recession and people fear that they might not have a job, that will bring people back to the office. You have to do what it takes to keep your job and to earn a living.”
Exactly. Many workers insist that working from home is more efficient. Therefore, corporations should simply get with the times and allow a permanent transition to telecommuting. The thing is, testing the patience of your employer is incredibly risky ahead of a possible economic downturn.
Take Airbnb (NASDAQ:ABNB) as an example. Earlier this year, it announced that its employees would be allowed to live and work anywhere. That sounds like the ideal management culture, right? Well, keep in mind that when the pandemic hit and times got tough, Airbnb laid off a big chunk of its workforce.
Therefore, it’s imperative that now – right flipping now – you start demonstrably confirming your value to your boss. If that means coming into the office, so be it. Better to collect a paycheck (especially during troubled times) than to be “working” from home, permanently.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
