How to Invest in a Tough Stock Market

In today’s stock market you need to know why a market can change on a dime and how you can beat the market at it’s own game. The changes in the markets are based on cyclical stocks that are influenced by economic growth commonly known as Gross Domestic Product or GDP growth. Normal economic growth is usually between -2% to 5%. When the economy is running at full speed, at or near 5%, the Federal Reserve will try to slow the economy if inflation seems to be becoming a problem. The only tool the Fed can use to slow the economy is by raising interest rates. Higher rates will slow the economy. This situation exists today. We have a roaring economy and the Fed has increased rates to a level where the economy is slowing down.

Cyclical stocks are stocks that are interest rate sensitive and rise and fall with the rates. Financials, house builders, retailers, auto manufacturing and tech companies are all cyclical in nature. These companies sell items that consumers or businesses will purchase only when the economy is improving or doing very well. Secular stocks are stocks that are not interest rate sensitive. These are the health companies, supermarkets and food companies. Secular companies sell items that people use on a daily basis and don’t need a roaring economy to be purchased.

A tough stock market will be beaten if the companies that are cyclical in nature are sold and secular companies are bought. The strength of the underlying financials are still important, but if strong companies with a long history of good management and quality earnings are purchased, you will be much more likely to earn a profit than with the cyclical stocks that will fall regardless of the strength of management. Because you know when the stock market is changing you can play the proper stocks at the proper time.

One additional tip is needed to produce the most income from your investments. These huge companies with quality management will get beaten down to a level where the growth investors can’t take the pain anymore and will sell to you, the value investor, who is purchasing stocks in companies that will bounce back at much lower prices than normal. These companies will cycle up and down with rates and you can act accordingly to maximize your investment.