There is a growing awareness that the markets are out of touch with the economy — dangerously so. A second leg down seems all but inevitable, with a potential replay of the March selloff in the works. So, what should investors do about it? The short answer is that Canadians should revisit the pre-pandemic market and consider the idiom, “if I knew then what I know now…”
How to play a second pandemic market crash
As a stock investor facing an overheated market clearly divorced from a risk-laden economy, you have a chance to go back in time. Consider the current phase as a tentative “top.” If this is indeed the top of the market, this makes now the perfect time to take things off of the table. That’s step one. Step two is to draw up that wish list of currently overvalued names.
Then wait. As the markets begin to deteriorate, buy shares in stages. This way, an investor avoids some of the risk of losing out on value opportunities on the way to the bottom. Indeed, the bottom could be anywhere, as investors discovered in March.
It bears remembering that all of the factors that led analysts to revisit the economics of the Great Depression in March are still with us in July. Household debt is high, and savings are running out. Conversely, the markets are marked by bullish exuberance. If ever the phrase “make hay while the sun shines” were applicable, it’s now.
Names to trim and names to build
Anything that suffered in March should be in your cross-hairs right now. Think insurance, banks, and oil producers. Things to build include anything that was resilient during the crash. Look at names that stood strong through the oil selloff as well. Gold stocks and consumer staples have been performing steadily on the markets. Names like Barrick Gold and Alimentation Couche-Tard stand out.
However, tech may see a pullback, since the quarantine conditions that boosted digitalization names are now old news. Investors are almost certainly going to keep rewarding “stay-at-home” stocks such as Shopify. This is because they fit the pandemic-appropriate narrative. But the sudden steep gains that such names enjoyed earlier in the year are highly unlikely to be replicable — and so too is their momentum.
Investors should therefore expect a tech stock pullback, a shedding of risk, and strengthening gold prices. This makes now a good time to second-guess those moves. For instance, Kinaxis has exceeded its median target, so consider trimming such names on their current strength. However, because this was a strong play during the pandemic, it definitely belongs on a watch list.
These positions can then be built up again for less outlay, as the market deteriorates — or replaced with names that are even more specific to the market. Healthcare stocks such as Viemed are likely to see increased popularity as the pandemic grinds on, for instance. Meanwhile, the usual suspects — especially consumer staples — are evergreen plays with even more upside potential on the way.
