For the time being, major media outlets are admitting a recession is no longer in site and that the U.S. economy remains strong. On Friday, the jobs data blew past expectations. The United States created 266,000 jobs in November versus 180,000 expected. The unemployment rate ticked down to 3.5% with average pay rising 3.8%. Even better, inflation remains below the Fed’s target 2% mark. Consumer spending represents two-thirds of the economy. So, because most consumers are working, we can expect a reasonably decent economy in the near future. The question is, do these unemployment numbers justify the sky-high valuations of the market?
As I mentioned in a post a few weeks ago, we’ve never seen an economy like this. We have low unemployment, decent wage growth, low interest rates, and very little inflation. And yes, it appears stocks are overvalued from a historical perspective. But since we’ve never seen these numbers before, is history really that good of an indicator? As a dividend investor I’ve tried to position myself to handle all market conditions. And because of this unique situation we’re in, I’ve begun slightly altering my strategy. Over the past several years I’ve averaged in roughly $2,000/month. Now, I’m focusing on building up a bit more cash in the event of a major correction.
Investors like Warren Buffett are in the process of hoarding cash, waiting for the next correction. Berkshire, Buffet’s company, is holding over $128 billion in cash. As always, I’m still buying, just not nearly $2,000/month. For instance, when the market dropped 300 points last week, I added on to my position in Honeywell. I’m also eyeing new positions in companies like CVS, Hasbro, Sonoco, Cracker Barrell, and Verizon. Because my broker eliminated trading commissions, I’m able to average in by a share or two at a time. So yes, from what we’ve seen in recent weeks, there is no longer an imminent threat of a recession. But there is a HIGH likelihood of a market correction.
As I discussed a few weeks ago, we could have a catalyst that brings this market lower. This doesn’t necessarily mean recession! A catalyst like bad trade news, geopolitical conflict (Hong Kong), or election jitters are but a few examples. The market could correct 10-20% despite the unemployment rate remaining at 3.5%. It happened in February 2018 and again in late December. Therefore, one would be foolish to be 100% invested when the market is priced to perfection. Holding a sizeable portion in cash allows investors to multiply their future returns. As prices fall, additional shares are purchased, dividend yields increase, and current income soars. And, yes, thankfully the economy is doing well. But that doesn’t mean we shouldn’t prepare for the future and plan for choppier waters.
DISCLAIMER: I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.