Coronavirus Recession: Should You Sell Your Stocks Now?

We’re in a recession. Before you buy a stock, know what you plan to get out of it. Is it for income or quick profits? One is riskier than the other.

| More on:
Businessman pulling out wooden brick from toppling stack

Image source: Getty Images.

Up till the start of 2020, the stock market was doing very well. Who would have thought that there would be a coronavirus-triggered recession and market crash in 2020?

Actually, COVID-19 was just a trigger for the market downturn. High debt at government, corporate, and personal levels already existed before COVID-19 arrived at the scene. There are other problems that can prolong the length of the market downturn. The gross domestic product is getting slaughtered. Moreover, stock valuations are at an all-time high.

There are different ways to look at this. Some investors might opt to sell their stocks now, while others might buy or hold. I’ll argue for both sides below.

Coronavirus recession: The case to sell stocks now

In a recession, the economy and most companies are going to report bad numbers. Trade Economics forecasts that the GDP growth rate in Canada for Q2 and Q3 are expected to be -3% and -1.5%, respectively. It also forecasts that it will be worse in the U.S. with the rate being -17%, -3.6%, and -3%, respectively, in Q2, Q3, and Q4.

As a result, some investors might choose to sell stocks now, as they expect stocks to go lower in the short term, at which time they can buy shares at cheaper prices.

Coronavirus recession: The case to buy or hold stocks now

When I say “buy stocks now,” I really mean to space out buys through 2020. Over the next six months or so, investors will probably be able to buy stocks at cheaper prices.

I’m inclined not to sell out of all my stocks. The stock market generally goes up in the long run, and you’ve got to hold shares to participate. Besides, most of my holdings pay dividends. The point of holding these dividend stocks is to generate passive income.

On one hand, I love receiving dividend paycheques. On the other hand, I also trade certain stocks for short-term price gains.

Investors need to be true to themselves. They should know why they buy a stock in the first place and have exit strategies if applicable.

Generally, though, stocks are long-term investments. If you aim to buy and sell quickly (say, within a year), that adds excess risk. The longer you hold a stock, the longer you give the underlying business to do its work. Just make sure you do the stock picking right, including choosing quality businesses.

Are stock valuations high?

Stock valuations will be temporarily high for the companies that will report lower or negative earnings this year.

For example, as a bank, Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is highly sensitive to economic boom and bust. In the last decade, the bank experienced greater growth than its peers due to its greater exposure to the U.S.

However, in this downturn, interestingly, TD’s more substantial exposure to the south of the border is a drag on its results. The bank is estimated to report roughly 11% lower in adjusted earnings per share this year.

As a result, TD stock trades at last year’s price-to-earnings ratio (P/E) of 8.5 but an estimated (more expensive) 2020 P/E of 9.6. Additionally, the medium-term growth for the North American bank is expected to be markedly lower than its longer-term target of 7-10%.

In the future, when economic and TD’s growth resume to normal levels, this temporarily high valuation will come down again as earnings rise. Moreover, in most years, TD’s exposure to the U.S. should help boost its earnings.

The Foolish takeaway

Investors should consider what individual stocks (i.e., businesses) are worth in a normal market instead of being too hung up on the short-term, gloomy results. Also, be very clear on what to expect from each investment.

If you have a long-term investment horizon of five years or longer, it should be a good investment opportunity to buy through the coronavirus recession this year.

In terms of TD, I think it’ll make a great long-term dividend investment if investors buy it on dips through 2020. It has good coverage of its dividend, which yields about 5.5% at writing. So, it pays you to wait for the North American economy to recover.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of The Toronto-Dominion Bank.

More on Dividend Stocks

Female hand holding piggy bank. Save money and financial investment
Dividend Stocks

RRSP Savings: 2 Top TSX Dividend Stocks to Build Retirement Wealth

Here's how investors can turn small initial RRSP contributions into substantial savings for retirement.

Read more »

Man holding magnifying glass over a document
Dividend Stocks

2 BMO ETFs Are Less Volatile Than BMO Stock

Two ETFs of a big bank are more suitable for risk-averse or ultra-conservative investors than its stock.

Read more »

Target. Stand out from the crowd
Dividend Stocks

1 Cheap Dividend Stock to Buy as Recession Fears Rise

Great-West Lifeco (TSX:GWO) is an undervalued financial stock that looks like a great buy, even as the world economy tumbles…

Read more »

Profit dial turned up to maximum
Dividend Stocks

2 TSX Stocks Paying Over 5% in Dividends

Add these two blue-chip dividend stocks to your portfolio for wealth growth through shareholder dividends and capital gains.

Read more »

Business people standing near houses models
Dividend Stocks

2 REITs to Own as Rental Housing Demand Rise

Two prominent residential REITs should be on your buy list, as the rental housing market picks up due to rising…

Read more »

Retirement plan
Dividend Stocks

FIRE Movement: How to Retire Early Using Your TFSA

You can increase your financial independence and even retire early by investing in solid dividend stocks in your TFSA over…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: 2 Stocks to Buy Now for a Personal Pension Fund

RRSP investors can find top TSX dividend stocks at cheap prices today.

Read more »

Cogs turning against each other
Dividend Stocks

1 Passive-Income Stock to Counter Volatility

Looking for a stock that can counter volatility now and tomorrow? This stock is a reliable option for growth and…

Read more »