Cash on the sidelines? How we invest in a downturn

What a difference a month can make. On the 19th of February, the Nasdaq index of US tech stocks closed at another all time high. It had risen 28% in the previous 12 months. By the 13th of March, it was 13% lower than that peak. The broader S&P 500 fell 10% over the same period and the US small cap index, the Russell 2000, fell 13% (all three rallied strongly on Friday 14th March).

I won’t rehash the reasons why here. You can read plenty of that elsewhere. Suffice to say the “US exceptionalism” train has derailed.

What does this mean for investors?

The impact of Trump's tariff measures 

It is worth noting that this correction was not just driven by a change in investor sentiment. Trump’s erratic tariff measures represent the largest upheaval to global trade since the Second World War. It is going to have implications, something that businesses and consumers have worked out quickly. The University of Michigan’s survey of US consumer sentiment registered its lowest reading since September 2022 a couple of weeks ago. Inflation expectations have jumped significantly. We are expecting economic activity to deteriorate rapidly in the US and are baking near-term recessionary conditions into our valuations. That is leading to wariness about economically sensitive US companies.

Where overreaction has created opportunity

With the turmoil comes opportunity, and there are opportunities emerging already. As in all corrections, the market reaction has not been uniform and plenty of babies are thrown out with the bathwater.

Within our own portfolios at Forager, we have deployed some incremental capital into shares that have been unjustly treated. Flutter (LSE:FLTR) is a good international example of an opportunity where the investment team has added back some of the money that was taken off the table recently. And AMA (ASX: AMA) here in Australia traded back near last year’s lows in the moves, despite reporting a solid half year result and showing excellent signs of progress. The team has added modestly to this investment, which is reflective of the fact that this has mostly been an orderly market unwind. The most expensive parts of the market have been hit hardest.

Deploying Cash in a Downturn

Bear markets come in all shapes and sizes and there is no way of knowing in advance whether this is a 10% correction or the start of a 30% meltdown. Hence, at Forager, we have fired a couple of bullets and kept plenty in the chamber in case things get worse.

If you are personally waiting to deploy cash, a similar approach could be appropriate. Many of you have heard my thoughts on the damage investors do to their long-term returns by trying to time markets. The allure of cash should largely be ignored. Focus on getting your portfolio allocation right and stick with it through thick and thin. The Dollar Cost Averaging approach also works well when investing through markets in turmoil

Many investors also ignore me. If that’s you, think about adopting a similar strategy to us here at Forager when considering cash. My pessimism radar is nowhere near extreme yet. But there’s no guarantee it gets there. If your aim is to deploy more cash through the cycle, there’s nothing wrong with doing what the team at Forager has done so far. If this is as bad as it gets, you have put a little money to work. If it gets much worse, you have plenty of your own bullets left to fire.

If this type of investing sounds interesting to you, subscribe to our monthly and quarterly reports to find out more about navigating and deploying cash into volatile markets.