Everything changed on Friday. With the surprise decline in U.S. jobs, investors were suddenly faced with the prospect that the economy was much worse than anyone thought.
No one seemed to care that the August drop in payrolls made a Fed rate cut almost inevitable. Instead, stocks tanked on Friday amid fears that the U.S. might be headed for a recession.
"A serious slowdown is obviously underway," Vinny Catalano, global investment strategist, for Blue Marble Research, told CNBC.com. "The U.S. may experience a moderate recession, but that will be mitigated by global growth and the strong position that most companies and most countries are in."
Instead of panicking, investors should look for ways to weather--and yes, profit from--the expected economic slowdown.
"I think this market correction that we are experiencing presents investors with an excellent opportunity to reposition their portfolios," said Catalano. "Focus on growth, move away from the financials and toward technology."
"You have to be careful of the stocks that are getting hit by the downturn in the housing markets," aid Michael Yoshikami, chief investment strategist with YCMNET Advisors. "Quality is really going to rule the day. Being selective in this kind of market is what serves you well."
Yoshikami likes Costco , even though the warehouse club retailer this past week reported August same-store sales well below analysts' estimates.
"We think those results are more an anomaly than anything else," said Yoshikami. "Costco has tremendous international expansion and a great management team. They have thin profit margins, meaning they are very much a discounter that we think will profit if there is a recession or a downturn."
He also recommends filmmaker DreamWorks . "This is a company that's building an inventory of movies and that's really where long-term profitability comes in," said Yoshikami.
YCMNET Advisors owns Costco and DreamWorks.
Add to Positions
Gary Kaminsky, managing director at Neuberger Berman, sees the current environment as an opportunity to add to positions that investors are comfortable with.
"We like companies that are going to grow their businesses, not contingent on being financed by equity or debt, but companies that can do it through internally-generated cash," he said.
Kaminsky continues to like Suncor Energy . "Here's a company where crude oil can be in the mid-70s, 60s or even the low 50s and it's going to continue to grow through internally-generated cash," said Kaminsky. "They have proven reserves that are going to outlast our lifetime. So they're in a position to grow the business regardless of what happens in the energy commodity markets or on Wall Street."
He also likes Enbridge , a Canadian energy transport company that operates in North America, Spain and Columbia. "You want to be in a business not focused on just growing based on the U.S. economy," said Kaminsky.
Kaminsy and Neuberger Berman own Suncor and Enbridge.
Look Out for the Wild Card
While expectations for an interest rate cut increased after the weaker-than-expected jobs data was released, Wall Street is still on pins and needles awaiting the next Federal Open Market Committee meeting on September 18.
"We think a huge wild card here is the Fed," Todd Salamone, director of trading at Schaeffer's Investment Research, told CNBC.com. "If we don't get a federal funds rate cut, the market is very vulnerable."
Salamone suggests investors be prepared for that scenario by hedging with near-term CBOE Volatility Index call options. "We think the Fed isn't going to do anything unless there are a lot of negative economic news reports," said Salamone. "We think the shorter-term option on the volatility index is where you get the biggest bang for your buck."
If the market advances, Salamone believes small- and mid-cap companies that are heavily shorted but have positive earnings surprises will lead the rally. He says that would include DryShips , which operates a fleet of drybulk carriers, and Chipotle Mexican Grill . Salamone also likes Garmin . "There's been a ton of concern about competition in that nagivation market and Garmin remains the leader," he said. "They have been dispelling a lot of those concerns."
ETS and Gold
Catalano suggests investors hedge against instability with certain exchange-traded funds and gold. "They should have 2% to 5% of their investments in gold," he said. "Gold is a hedge against instability and we are permanently in unstable times."
Catalano also likes the Technology Select Sector SPDR , the Industrial Select Sector SPDR and the iShares Dow Jones US Aerospace & Defense exchange-traded funds. "The tech ETF has an excellent large cap tech and telecom mix," he said. "I like the industrials because the need for capital goods and growth in the emerging markets continues to be strong, and you need defense for an unstable world."
Phyllis Burke Goffney is a news editor at CNBC.com. She can be reached at firstname.lastname@example.org.