There’s a saying that bad news often comes in threes. That was certainly the case for TSX investors this week. Thursday saw two bleak outlooks dumped into the news cycle along with a resultant market crash. Though the markets rallied Friday, pundits were already beginning to revise a V-shaped recovery model as a potential W-shaped one. But if the pain isn’t over yet, what should investors do to safeguard their portfolios?
Dig into long-term stocks and get defensive
Jerome Powell, chair of the U.S. Federal Reserve, suggested Wednesday that a return to the pre-pandemic labour market could take years. In Powell’s words: “We have to be honest that it’s a long road,” Powell said. “It’s — depending on how you count it — well more than 20 million people displaced in the labour market.”
Wednesday also saw the Organisation for Economic Co-operation and Development (OECD) report that the world is in the grips of the worst peace-time recession in a century. Among the projections was the potential for a second wave of COVID-19 to impact the Canadian economy by 9.4%. Even at current levels of transmission, the damage could be around 8% this year.
The revised outlook sent stocks into a meltdown, with the markets experiencing their worst contractions since March. The TSX closed down 650 points (4.2%). The Dow dropped 1,860 points (6.9)%, compounded by rising cases of COVID-19 and the official revelation that the U.S. had entered recession in February. Investors awoke Friday to tattered markets, underpinned by a dire outlook.
A return to recession investing
Much of what happens next is contingent on how the reopening pans out. The OECD laid this out most succinctly in a series of Tweets on Thursday. The OECD warned that “as COVID-19 restrictions begin to be eased, the path to economic recovery remains highly uncertain and vulnerable to a second wave of infections.”
In another Tweet, the organization warned that, “Job losses in the most affected sectors, such as tourism, hospitality and entertainment, will particularly hit low skilled, young & informal workers.” A further Tweet warned that “Global economic activity is predicted to fall by 6% in 2020 if a second wave is avoided. However, in the case of a second outbreak, this drops to 7.6%.”
Diversified dividends are the order of the day. Investors should refrain from panic selling and hold back on betting the farm. Utilities stocks that pays dividends and support a growth thesis are a strong buy right now, with names like Algonquin Power & Utilities standing out. Consumer staples stocks are also a solidly defensive play. Names like Alimentation Couche-Tard are performing strongly and make for a low-risk pick with built-in diversification.
Investors should plan for the best but prepare for the worst. Keeping cash on hand increases liquidity and also allows investors to snap up undervalued names. Having a watch list of stocks and desirable entry points will help investors to keep track of wished-for companies. In the meantime, investors should be prepared to trim weaker names during rallies and build positions during the dips.
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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 Victoria Hetherington has no position in any of the stocks mentioned. The Motley Fool recommends ALIMENTATION COUCHE-TARD INC.