It all began with tech stocks. Investors began to get jittery about overvaluation, and the reverberations saw declines in some of the biggest names in tech. But the decline spread, boosted by fears that COVID-19 could be into its second wave.
While vaccine rallies have seen some areas, notably industrials, see some gains, this is still a market dominated by the pandemic. Just look at rocketing gold prices for a sure sign of rising risk.
Meanwhile, down in the U.S., millions of unemployed Americans are on tenterhooks as Congress hems and haws over an enhanced payments extension. The US$600 payment has been a key economic support strut south of the border. Its cessation could very well have the potential to seriously rattle the markets.
As many investors expect a recovery sooner or later, the downside risk from sudden bad news is increasingly tangible.
Get ready for a frothy few months
Investors should expect volatility, hold cash, and begin taking names off the table ahead of a downturn. They should also begin to look to the mid-term. The risks to the market are likely to be more strongly correlated with the realities of the economy after a serious correction. The state of the economy is therefore key to stock market performance in the latter half of 2020 and heading into 2021.
But what will the economy look like in a few months? The answer depends on several factors, all of which are complex. These include the potential for a second wave of COVID-19 infections, the timing of a comprehensive vaccine rollout, and the cessation of fiscal stimuli. Other palpable stressors include the potential for international hostilities and natural disasters.
Investors should be looking to trim tech stocks and building up positions in. In the “trim” column belong such overvalued names as Shopify. Meanwhile, defensive stocks include Fortis and Barrick Gold. Looking ahead to a post-correction recovery, stocks with an industrial edge could appeal. Diversified metal stocks such as Lundin Mining would be a good fit for this type of investment.
Low-risk stocks are a strong buy
Investors should weigh up the high-momentum plays of tech versus gold. It’s been an especially standout year for the latter asset type, with investors latching onto the mix of attractive fundamentals, positive outlook, and safety. Barrick has proven especially popular, gaining almost 60% since this time last year.
This trend is matched by other gold miners, with Franco-Nevada, for instance, also seeing 12-month gains of around 58%.
While Shopify is up 141% year on year, at $1,247, it’s trading considerably higher than its average consensus of around the thousand-dollar mark. Tech stocks have recently seen a bit of a pullback, with the sector tensing for a vaccine and investors getting overvaluation jitters.
In the near-term, overvalued stocks, especially tech stocks, are at the greatest risk of depreciating. The tech stock pullback has already begun, but there is plenty of scope for further losses. Appetite for risk is also likely to fall as a correction ripples through the markets.
This will likely reverse some of the extreme contrarianism that boosted chewed-up assets such as airline stocks.
