What to buy after a stock market correction?

OK so ArabianMoney is taking a view on a correction over the rest of the summer and into the autumn. Given the scale of the rally what has gone up so far probably has a long way to fall.

But when things look really bombed out what should investors be looking to buy? It could be the buying opportunity of a lifetime for those with cash, and we noted that Agora Financial investors in Vancouver were mainly long cash.

Class act

Unfortunately it will not be an easy decision. Should you just buy all the great stocks you should have bought for the previous rally? Or think again and buy a different asset class?

In Marc Faber’s classic ‘Tomorrow’s Gold’ he points out that market bubbles seldom reoccur in the same asset class immediately and that it is almost always wise to shift asset class. But with stocks you can shift your asset allocation without moving out of equities.

For example, if you fear inflation in the future then gold and oil equities might look attractive after a big sell-off, while other stock prices would be adversely impacted by inflation. That is probably how ArabianMoney will jump.

But that will require some imagination from investors whose immediate fear would be the deflation that would follow a stock market correction and into 2011. Indeed, it is hard to think how a faltering recovery would mean anything else, with pressure on consumer prices from falling demand as well as falling asset prices.

Deflation fears

Gold and oil bugs would have to be brave and buy while most investors were still fearful of deflation, while not realizing that the policy response from the Fed – stimulus packages two and three – is bound to ultimately be inflationary, and very dangerous to the global financial system.

It is not for nothing that the Chinese central bank has just liberalized gold trading by its banks. The use of gold as an international currency is happening as banks desperately seek a solid medium of exchange, and this just has to ultimately mean much higher prices for precious metals.

If we are back to the late 1970s then gold and oil equities will be the asset classes to be in for maximum gain, although we will also be looking at various long ETF options which might do better still. Details will be available only to our newsletter subscribers, why not join this growing club? Click here for more information.