Stocks finished with modest gains Friday, but the main U.S. indexes still ended with weekly losses as doubts rose about the staying power of the recent rally sparked by signs of easing U.S. inflation. Stocks turned lower earlier in the week after St. Louis Federal Reserve President James Bullard said the central bank’s appropriate target for the federal funds rate could end up as high as 7%, well above the current 3.75%-4% range. The Boston Fed’s Susan Collins followed up on Friday that she was not ruling out a 75-basis point rate hike in December. For the week, the Dow Jones average ended flat, while the S&P 500 dropped 0.7% and the Nasdaq Composite slid 1.6%.

The key indicator for the upcoming slowdown was retail sales. While most retail companies posted good numbers for Q3, the outlook for Q4 was pretty dim across the board. There is a big shift among consumers from Whole Foods to Walmart as consumers cut back on spending. And despite that, Walmart said sales of discretionary products are dropping signaling that consumers are buckling down.

Future Wealth’s View

It is evitable that the country will have to endure a recession soon. But, it is not all bad for investors. It only means that investing in a recession will have to be different from investing in a bull market. During a recession, with high interest rates and lower disposable income, several sectors of the economy that performed well during a bull market will underperform.

Those investors who recognize the shift in the investing landscape will be rewarded. Those who hold on to stocks that have gotten beat up in the past year (Facebook, for example) hoping they will come back to their purchase price may want to take a few lessons from holders of Cisco from 2000, who are still waiting for the stock to breakeven. Cisco reached an all time high of $77.41 in March 2000 and has never reached that level since.

The housing market cracked first, the job market is cracking, retail sales is next and then Wall Street cracks. Make judicious investment choices now before it is too late.