The outlook was bleak Thursday after the Fed issued a stark warning that the U.S. economy could not face further closures as a result of the spread of COVID-19. Markets returned to April lows on renewed fears, as investors got an injection of reality. Friday saw markets rally, with the TSX seeing early gains of 300 points (2%). But was the rally just another dead-cat bounce?
Prepare for a W-shaped recovery
There are few signs that the impact from the pandemic is about to ease up, and an array of hurdles that will have to be passed on the route to a full recovery. Investors should therefore be looking at a timescale of at least six to 12 months, as they massage portfolios for a new balance of risk and reward. All eyes will be on transmission rates as the threat of a second wave of infections menaces the markets.
The U.S. and Canadian stock markets have shown considerable disconnect from actual economic forces of late. Equities have been rallying on a widespread assumption that normal operations would soon resume. However, with the top-down assertion that this is unlikely to be the case, the TSX — in line with the major U.S. stock exchanges — is now undergoing another correction.
As before, it’s time to break out the recession investing guides and get back down to basics. Investors seeking to make a stock portfolio safer while continuing to buy shares in the current market may want to use the build-and-trim method and buy outperforming stocks.
The all-weather stocks that beat the selloff
It’s always a good idea to make a note of which names see gains during a broad market selloff. South of the border, only four names stood out immediately after markets plunged Thursday. These were Kroger, Kimberly-Clark, Cabot Oil & Gas, and Netflix. Kroger and Kimberly-Clark are “essential item” stocks, with the former being a major grocery name and the latter a producer of tissue and personal care items.
The TSX saw similarly few tames ticking higher as Thursday wore on, with only four names standing out as the index lost more than 640 points (4.1%) in just a few hours. The TMX Group was just about in the green, while some unlikely names such as Transcontinental (up 5%), HEXO, and Jamieson Wellness saw some gains.
Let’s break down why these names have outperformed. Let’s take the short view first. Thursday was disastrous, seeing a sea of red engulf all corners of the TSX, except for very few exceptions: Transcontinental bounced on a positive quarterly report, while cannabis investors brushed off market fears. Taking the longer view, names like Barrick Gold and Alimentation Couche-Tard are low-risk plays.
Another way to single out the best-performing names on the TSX is to compare share prices with last year’s price tags. Names that stand out include CN Rail, Barrick Gold, Alimentation Couche-Tard, Shopify, Franco-Nevada, Waste Connections, and Constellation Software. Taking the longer view helps to cut through the headline blur and hype to identify which names are truly outrunning the pandemic.