This is a brutal market, there’s no doubt about it. The Dow on Wednesday saw its biggest one-day decline since 2020, the latest in a sell-off this year that just won’t stop. Doesn’t matter if you’re a new investor or have been doing it for decades, this is one of the most difficult markets to navigate in a long time. That said, while we may not be able to control the day-to-day action in the market, we can control how we react to it. As we’ve seen from Club names Amazon (AMZN) and Walmart (WMT), as well as Target , even the best operators in the world are being caught off guard by the swirl of crosscurrents. From rising consumer and wholesale prices to wage inflation to supply chain bottlenecks to Russia’s war in Ukraine, it’s all impacting the macroeconomic operating environment and trickling into earnings results and management forecasts. While it first appeared that troubles plaguing Walmart were company specific, Wednesday’s first-quarter results from Target make clear that this is a broader consumer issue: inflation is causing buyers to reprioritize their purchase activity. There’s still gobs of money being spent — too much money if you’re the Federal Reserve’s Jerome Powell . Recall both Walmart and Target beat sales expectations. But make no mistake, inflation in necessities such as food is eating away at corporate profit margins, and discretionary spending is shifting from goods to services and experiences. Looking at the current uncertainties facing investors — and you can take your pick — nearly all of them are exacerbating inflationary pressures. In turn, the Fed ‘s relentless effort to cap rising prices while trying not to tip the economy into recession makes it difficult, if not impossible, to call a bottom in the stock market. Remember our mantra We have never relied on our ability to call bottoms as a means of investing. Instead, we look to own high-quality names that — because of earnings resiliency and a positive longer-term outlook — actually do get cheaper as they go down. That bears repeating: We want to focus on stocks that actually get cheaper as they go lower. We believe in buy-and-homework, not buy-and-hold, investing. We stay close to our holdings and do the daily research so you can stay close, too. Remember, a stock’s price is only half the valuation equation. As we have said since the end of last year, the only other metric we’re interested in to value stocks is earnings. We want to own shares of companies that do things and make stuff for a profit and can return excess cash to shareholders via dividends and buybacks. Said another way, if a stock declines, but earnings in the underlying company stay the same or increase, the price-to-earnings multiple goes down and becomes cheaper on a valuation basis. Conversely, a stock could end up being more expensive on a valuation basis if price goes down and earnings go down, too. Given our focus — again, buying the stocks of high-quality, cash-generating businesses that get cheaper when the share price goes lower — our intent is to ride out this volatile period and take our opportunities on the way down. Don’t be a hero We know things are uncertain, there are issues in China that will impact tech. Apple (AAPL) called out a potential $4 billion to $8 billion revenue headwind — and at this point, it appears we’re looking at the higher end of that range. Qualcomm (QCOM) is exposed as it generates a significant amount of revenue in China. Supply chains in general are at risk of China’s zero-tolerance approach to Covid. Cisco Systems (CSCO) shares were getting crushed after hours Wednesday because the company couldn’t get the parts it needed out of China. It would have made its quarter, if not exceeded it, if China hadn’t foolishly locked down. It will be the same deal next quarter if China doesn’t open up; hence the cautious, horrendous guide from Cisco. Against that backdrop, we have no intention of being heroes and making statement buys or trying to call bottoms. Instead, as we always do, we’re looking to reduce the cost basis on those names that we believe will either work in this environment due to the necessity of their products and pricing power. We also want to do that in names that are beaten down in near term but that we still believe have bright futures on the other side of this storm. High-grade your portfolio At the same time, we want to high-grade the quality of our portfolio overall, like we’ve been doing over the past six weeks. For example, we’ll be looking to unload more of our position in American Eagle Outfitters (AEO) to redistribute the funds into our newer positions, such as Pioneer Natural Resources (PXD), Coterra Energy (CTRA) and Procter & Gamble (PG). We initiated a position in Johnson & Johnson (JNJ) earlier Wednesday with cash from an AEO sale. We have plenty of firepower to buy on the way down and will not hesitate to do so, provided we don’t do it all at once. We hardly bought Wednesday because we thought prices would go lower, and they did. We believe that energy names — which are more focused on shareholder returns than production growth even with elevated oil prices — will continue to work so long as crude can hold above $80 per barrel; break-even prices are less than half that price. Energy stocks were all down Wednesday. If they’re down again Thursday, we will be buying. Consumer staples names such as P & G — which released strong earnings results — can continue to work. That’s because they have pricing power provided by innovation, which despite higher upfront costs often makes their offerings cheaper on a per use basis. In our view, P & G is being pulled down due to the broad, indiscriminate selling of exchange-traded funds. The company is doing much better than the stock, at least for now. Meanwhile, a name like J & J remains investable because even in the worst of times, consumers will prioritize spending on health care. Plus, investors will be willing to pay a premium to the broader market valuation for that kind of earnings stream. Bottom line The bottom line is all this: Panic is not a strategy. And as negative as everything seems right now, betting on the end of the world is a bet you can only make once. If you’re right, you probably won’t be around to realize those gains anyway. We have to keep a level head and remember that this is how markets operate. The reason equities have historically provided the best return of all asset classes is because investors are paid to endure pain like this. Zoom out and keep in mind that we will get through this. So long as we focus on high-quality, cash-generating businesses that get cheaper as the stock goes lower, the market will recover from this as the Fed gets inflation under control, supply chain bottlenecks are worked out and geopolitical tensions ease. This type of market action does not come to a sharp end. We don’t know when it will stop. It will play out over time. It’s our intention to buy slowly as the market becomes more oversold with larger declines that make each buy more impactful to our basis than we would under more normal market conditions. We’re not going to overtrade , as evidenced by our commitment to Costco (COST) through next week’s earnings — despite the stock getting crushed Wednesday with the rest of retail. We said it would happen on Wednesday’s “Morning Meeting,” and it did. But there are times when you just have to put up with the tension and the pain because a company is that good. Costco is that company. While remaining as nimble as possible, we remain long-term investors and believe that more often than not, overtrading will simply lead to a death by a thousand cuts. We want our focus squarely on finding strong long-term trends in stocks we can believe in so we don’t miss the economic and market recoveries that will come when the headwinds noted above are resolved. It’s easy to jump out. It’s not easy to get back in. We will stay the course, picking up merchandise that’s on sale out of fear and high-grading our portfolio at the same time. (Jim Cramer’s Charitable Trust is long AMZN, WMT, AAPL, QCOM, CSCO, AEO, PXD, CTRA, PG, JNJ and COST . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
