The market has been celebrating the tariff deal between the U.S. and China, and the S&P 500 (^GSPC -0.67%) continues to rise, up 5% since the announcement. But is it too fast, too soon? Tariffs are still elevated, even if they will no longer be 145% on Chinese goods, and the company results are starting to come in. Walmart said that it would need to raise some prices due to new tariffs, and Target lowered its full-year guidance.
Investors got a stark warning from JPMorgan Chase CEO Jamie Dimon at its annual investor day this week about the state of the economy and how the market is reflecting it, or actually, not reflecting it. “It’s an extraordinary amount of complacency,” he said, noting that the market didn’t seem to appreciate the full potential of how tariffs could impact company performance. He also pointed out that credit is still expensive, and it could be hard for many companies to get cheap financing.
Image source: Getty Images.
In other words, there’s still a potent mix of economic factors that could negatively impact financial statements, and he sees the market falling as much as 10% in the near future. While 10% isn’t a market crash, it will draw out market volatility and keep it from bouncing back into another robust bull market. And this is just one view; it could be better, but it could also get worse.
Is he right? There’s no way to know, but he makes very reasonable points that every investor should consider. Here are three things investors should do to prepare.
1. Keep cash ready
The market’s already creeping back up, and it’s getting expensive again. The average S&P 500 P/E ratio is close to its highest level in three years. It’s getting harder to find bargains in this kind of market. If the market does fall again, you’ll want to have cash ready to pounce on good deals.
S&P 500 P/E Ratio data by YCharts
Investing legend Warren Buffett has built up Berkshire Hathaway to its highest cash level ever, and it keeps growing, standing at $348 billion as of the end of the first quarter. That’s a lot of patience.
Buffett has praised incoming CEO Greg Abel as being able to act quickly when opportunity knocks, and that’s one of the reasons he thinks he’s going to be a great CEO for Berkshire Hathaway. Buffett said at this year’s annual meeting: “There are times when you have to act fast. In fact, we made a great deal of money because we’re willing to act faster than anybody around.” You can’t act quickly if you don’t have cash on hand.
2. Keep investing in solid picks
At the same time, in order to win in the market, you need to be in the market. Even Buffett is still investing today, and Berkshire Hathaway bought seven stocks in the first quarter.
Since no one knows when there might be a correction, crash, or any other market event, you should buy solid winners at sensible prices. If the market is expensive, as it is today, you should pay more attention to valuation and choose long-term value stocks that can withstand market volatility.
Try to block out the noise and focus on the future. Over time, the broader market has created incredible shareholder wealth, and the earlier you invest, the more your money has time to compound. Keep investing.
3. Don’t panic sell if there’s a crash/correction
Investing in the market means staying in the market. No losses are realized unless you sell. It can be scary to see your portfolio explode and tempting to take your money out before it heads even lower. But successful investing means being able to ride out the waves, even when they’re intense.
The S&P 500 has delivered an annualized gain of 10.5% over the past 20 years, which include several market crashes. It’s always recovered, even though it could take time. Have cash ready, choose great stocks, and stay in the market, and you’ll be primed to weather any market drops.
JPMorgan Chase is an advertising partner of Motley Fool Money. Jennifer Saibil has positions in Walmart. The Motley Fool has positions in and recommends Berkshire Hathaway, JPMorgan Chase, Target, and Walmart. The Motley Fool has a disclosure policy.
