Opinion: Don’t forget that the big money in stocks is usually made during down markets

The VanEck Semiconductors ETF
SMH,
-0.90%
is down 12%.

The Nasdaq Composite Index
COMP,
-0.29%
is down 9%, and the S&P 500
SPX,
-0.47%,
the Dow Jones Industrial Average
DJIA,
-0.58%
and the Russell 2000 Index
RUT,
-0.62%
are down about 5% each.

Now that’s a real sell-off, at least in the tech and crypto worlds. This is what the declines in ARKK and bitcoin look like:

A 20% drop from top to bottom is considered a bear market by most definitions. Seeing that happen over a span of 15 trading days might even be considered a crash. 

In the past month or so, as the market rallied hard off its early-summer lows, many traders and pundits had decided that the Federal Reserve was going to pivot quickly from focusing on fighting inflation to cutting interest rates to help prop up asset prices (again).

That’s been the Fed playbook for the past few decades, right? The “Fed Put,” they called it. But as I’ve been saying for the past year since the Bubble-Blowing Bull Market popped, we are in a new paradigm.

The playbook that we’ve been using for the market and Fed and economic cycles during my entire professional investing career goes back to the mid-1990s, when technology innovations and productivity enhancements flowed through the economy and kept inflation low. 

With the onset of the coronavirus and the trillions of dollars the the federal government and the Federal Reserve pumped through the system — not to mention the uncertainties in China, Taiwan, Russia and Ukraine — we entered a new paradigm.

Unstoppable inflation

The Fed can’t cut interest rates anytime soon if inflation doesn’t get back down to levels of 2% to 3%. Even though it’s great to see inflation in the U.S. creep down from the nea- 10% levels of a couple months ago, the Fed can’t declare victory at 6% inflation — or at 5% or even at 4%.

There’s no guarantee, and, in fact, it might even be unlikely that inflation heads back down to the 2%-3% levels it was at during the old paradigm. Inflation could drop down to 4% this month and then rebound back up to 6% next month and then down to 3% and then up to 7%. Inflation doesn’t always move in a steady manner. 

Looking back, when the stock market neared its post-financial-crisis bottom in early 2009, I explained to Ron Paul and Peter Schiff why I expected the U.S. economy to boom again and for the stock market to enter a bubble that could last for years, in large part because the Fed and the Republican-Democrat Regime were about to print as much money as they wanted, without having to worry about inflation.

This time around things are different. Inflation is real, it is global and it’s not stopping yet, much less getting down to 2%. The federal funds rate could climb to 6% or 7% or higher before this cycle ends. 

Opportunities abound

You don’t have to invest based on these broad macro and market themes. The good news is that even in bear markets — especially in bear markets — you can find individual stocks that will double and triple during recessions. You can find long-term buying opportunities in names that are about to change the world but are getting slammed by shortsighted investors.

Recall that I bought Apple Inc.
AAPL,
-0.48%
in March 2003 and have owned it ever since. Here’s what Apple and the Nasdaq’s respective three-year charts looked like when I got the chance to buy Apple at $12 a share (split-adjusted 25 cents a share):

And here’s what Apple and the Nasdaq’s respective charts have done since March 2003. That flat-looking orange line along the bottom is the Nasdaq chart, which went up almost 800% since March 2003 — pretty good performance. But not compared to Apple’s almost 62,000% return over the same time frame:

I plan on finding us another Apple at 25 cents and another Google
GOOG,
+0.22%
at $45 and another bitcoin at $100 and another few Revolution stocks that can soar.

Do I even remember that Apple was down 50% in a straight line during 2008’s sell-off? Or that it was down 40% during 2020’s Covid Crash? Yes. The point is that we can’t time market movements within our portfolios. But we can find a few stocks that go up more than anybody ever thought they could. 

The big money

The big money on Wall Street is made by investing in the stocks of great companies that change the world when prices and valuations are down.

I plan to keep doing that, focusing on the best companies in Space, Onshoring, Biotech and maybe in the metaverse and AI too. Stay tuned to what matters, not to the noise, but let the noise open up the opportunities to buy great stocks at better prices. 

Cody Willard is a columnist for MarketWatch and editor of the Revolution Investing newsletter. Willard or his investment firm may own, or plan to own, securities mentioned in this column.

Hear from Ray Dalio at MarketWatch’s Best New Ideas in Money Festival on Sept. 21 and 22 in New York. The hedge-fund pioneer has strong views on where the economy is headed.