Is a Big-Time Fall Sell-Off Coming? Play Defense With These 7 Proven Moves

All the signs that the long AI-driven stock market rally that started in November 2022, with the debut of ChatGPT, is almost out of steam are beginning to show up everywhere. While we have seen a strong move off the April lows, euphoria and a landslide of momentum, and retail investors’ cash has poured into some of the most speculative corners of the stock market, reminding Wall Street veterans of the late 1990s and the dot-com implosion. With the S&P 500 clicking off all-time highs until just recently, seemingly every week despite trading at 26.05 times trailing earnings, many feel that the combination of tariffs, the market being way overbought, and the fact that the Federal Reserve has been spooked by the recent Producer Price Index, and may tap the brakes on multiple rate cuts this year.

While the equal-weighted S&P 500 has broadened out some this year, which is a huge positive, it could be time for the market to take a breather after the frantic late winter and spring rally. One positive is that consumers and businesses are generally in reasonably good financial shape, at least for now. Stock portfolios and home prices have increased dramatically over the past few years, and the economic system is not teetering on the abyss as it was globally in 2008 when Bear Stearns and Lehman Brothers collapsed. To avoid a similar fate, Merrill Lynch was acquired by Bank of America.

One thing is for sure: If inflation moves higher, the wars in the Middle East and Ukraine don’t finally end, and our crushing national debt, approaching $36 trillion, continues to spiral out of control, the path of least resistance will be down. Investors should consider seven smart moves to do now.

Start building cash reserves now

Matching current losses against gains, even if they are short-term, makes sense to help build up a cash supply. The proverbial dry powder may come in handy down the road. Move the cash to high-yielding money-market funds. Some pay as high as 4% with daily liquidity and are insured by up to $250,000 by the FDIC.

Consider closing out any speculative margin positions immediately

Margin is the money borrowed from a broker to purchase stocks. When times are good, using margin loans to buy more stock is an evil plan for individual investors, especially when those margin positions are high-volatility momentum stocks. If the market collapses, a highly leveraged investment account could be destroyed. Plus, margin interest at almost all banks and brokerage firms is typically very high and charged as long as you have the position in place.

Gold and silver still make sense now

As we have recommended for years at 24/7 Wall St., a gold position helps mitigate the downside. As we noted last year, the precious metal did return to all-time highs and has continued to move toward the $3500 level, but it could explode higher in a market crash. One great way to invest in gold is the SPDR Gold Shares (NYSE: GLD), one of the best pure plays on gold for investors. The trust that sponsors the fund holds physical gold bullion and some cash. Each share represents one-tenth of an ounce of gold. However, the fund does not pay a dividend.

Make sure investments are reinvested in more shares

Please ensure that all the dividend-paying stock and mutual funds in personal and retirement accounts are coded to reinvest all capital gains and dividends, if possible. This allows you to buy more shares when prices are hit hard. The fourth quarter is coming, and many stocks and funds pay dividends on a calendar quarterly basis. Check with your broker if your stocks offer a DRIP or dividend reinvestment plan. If the shares you own don’t have a DRIP plan, at many firms, you can buy more shares with dividends paid to your account at no charge.

Rental real estate can help soften the blow

Consider real estate if you have the good fortune to come into a windfall, like an inheritance or a similar financial gift. While mortgage rates have increased over the past two years, the 30-year fixed rate has risen as high as 7.25%. However, it has fallen back to 6.21% for a 30-year FHA mortgage, and while still reasonable on a historical basis, it’s the highest since 2008. Owning a cash-generating passive income rental property makes sense now. Typically, real estate is not correlated to the stock market, so it will not lose value in a big market sell-off.

Pick stocks very carefully now

Conservative stocks delivered a positive annualized return every decade, beating their speculative peers in many periods. If you need stock ideas now, look at highly conservative ideas, which are less affected by even the worst-case scenarios. In other words, look at companies that provide goods and services that are needed all the time, such as utilities, telecommunications companies, consumer staples, and real estate investment trusts.

Short-dated U.S. Treasury bills and bonds make sense

Treasury bonds and T-bills include a range of debt securities issued and backed by the US government. You can sell high-volatility stocks and look at the short end of the Treasury market. The 2-year note, like all Treasury debt, is guaranteed by the full faith and credit of the United States and yields a solid 3.80%. One-year certificates of deposit yield as high as 5%, and money market savings accounts, FDIC-insured up to $250,000, yield anywhere from 3% to 4% with daily liquidity. One of the funds we highly recommend at 24/7 Wall St. is the SPDR Bloomberg 1-3 Month T-Bill ETF (NYSE: BIL). The fund invests substantially all, but at least 80%, of its total assets in the securities comprising the index and in securities that the Adviser determines to have economic characteristics substantially identical to the financial characteristics of the securities comprising the index.

Stock rallies don’t last forever

Can the stock market rally continue if rate cuts no longer appear on the way as fast as anticipated, earnings slow, and forward guidance for the fourth quarter and 2026 is weak? The massive three-year bull market run has been a blessing for many and now could become a curse. Numerous drops and corrections have occurred over the years; the fourth quarter of 2018 was a good example when the S&P 500 declined 18% on an intraday trading basis over three months. Toss in 2025, when in a very short period, we saw a 20% decline in some indices in about eight weeks

Remember that even the most challenging human history and investing events have eventually been overcome. Whether healthcare-related, war-related, foreign geopolitical or domestic troubles, or other issues that have combined to cause market sell-offs, they ultimately end. It makes sense to take advantage of the recent massive increases in stock prices over the past two and a half years and shift to higher and safer ground.

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