I am long on record as an extreme skeptic of doom-loop and daisy-chain scenarios, where action A causes market reaction B and then investments C, D and E crash as traders and investors lose nerve and everyone's portfolios drown in a flood of madcap selling.
For 40 years, I have written that it is dumb to make quick portfolio decisions based on political and international events. And I have been correct to believe that when reliable investments get indiscriminately slammed, there is enough smart money to undo some of the damage.
That is the DNA of my three-day rule, which holds that in any news-driven plunge, sober-minded buyers will arrive in roughly 72 hours wielding significant sums of cash.
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The exception was the crash of 2008, and that was because multiple banks went bust and Wall Street had no rescue money. Bank failures and widespread bond defaults are crushing. Fortunately, with the U.S. economy borderline booming entering this year, the banks seem sound.
But the trade war and, worse, the utter confusion about what it is supposed to achieve and on what timetable stand to undermine all my time-tested doctrines. I wish I were confident that financial markets will push back enough to influence the policymakers.
But all indications say that this is not a three-day story. S&P 500 companies earn 40% of their profits outside the U.S. And America's fixed-income markets depend more than before on overseas buyers looking for higher yields along with the comfort of owning debts denominated in strong dollars.
For now, I expect a rush to find both relative protection from the protectionists and the most-secure cash flows. The consensus is that economic growth will slow if not roll over into a recession, and inflation will head back up above 3%.
Long-term interest rates may fall further for a while on fear, but this stagflation implies they will eventually climb. Do not fall for the temptation to buy long-term Treasuries or bond funds, including high-yield bonds, which are closely correlated to stock prices. Feel free to lighten up on those assets, too.
The least bad options
So, then, what else do I suggest? I'll highlight four ideas that start with D – as in detergent, diesel, dividends and dollars (meaning cash and cash equivalents). But even these might be just the least bad options.
In early April, as shell-shocked shareholders watched the stock market disgorge trillions of dollars, detergent, which is shorthand for Procter & Gamble (PG) and other makers of consumer staples, withstood the worst, as did utilities and high-dividend names such as AT&T (T) and Verizon (VZ).
Low-volatility dividend funds such as the Franklin U.S. Low Volatility High Dividend Index (LVHD) and the Federated Hermes Strategic Value Dividend (SVAAX) are keepers.
Diesel, by which I mean fuel handlers such as pipelines, is under pressure from fast-falling oil prices. But the cash flows from the volume of energy use are reasonably predictable, so you can expect high dividends.
The best D of all for now is dollars, as in cash or ultra-short-term bond funds such as the Fidelity Low Duration Bond Factor (FLDR).
The Federal Reserve may cut interest rates in the coming months to support employment, so you might be wise to lock in CD and Treasury-bill ladders sooner rather than later.
But there are no sure things in the short run. I've seen a lot in my long career. This breaks the norms.
This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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