Many analysts and investors, including me, have talked about the risk and uncertainty this year that could lead to a market crash.
There are a variety of reasons the market could crash this year. Yet despite all these issues and all the risk and uncertainty in financial markets worldwide, North American stocks continue to tick higher.
So, with all this continued growth while there is so much risk, could the market just keep rallying forever? If it continues to rally now with so many headwinds, what will stop it as the economy continues to improve and we move closer to a vaccine?
The answer is that nobody really knows, but today, the risk is at its highest.
Ever since the market crash and subsequent recovery rally, a lot of TSX stocks have looked overvalued. Despite one of the worst economic impacts in years, and millions of people out of work worldwide, many stocks and stock indices are either just off their pre-pandemic high or have already surpassed it.
This has been the main reason that many expect another market crash. However, now that news has been released about a potential vaccine, investors may be wondering if a lot of the risk has subsided and if there is any potential for another market crash this year.
Can a vaccine prevent a market crash?
When the news of Pfizer’s vaccine being more than 90% effective came out, naturally, the stock market rallied. However, taking a deeper look at the information available to us, it doesn’t seem like this announcement has changed much when it comes to the uncertainty of the pandemic.
You could make the argument that stocks are forward-looking. However, much about what we know about the vaccine doesn’t necessarily point to a rapid recovery for the economy next year.
First off, we don’t even know if the vaccine is safe yet. It could be effective, but if it creates dangerous side effects, it won’t get approved.
Secondly, there is excitement that some of the most at-risk people (front-line workers, the elderly, and those with pre-existing conditions) could receive a vaccination as early as the end of this year. While that’s important to save lives, many are missing just how difficult it would be to distribute the Pfizer vaccine, especially in third-world countries.
Another thing worth noting is that the second wave continues to get worse all over the world. This could cause more economic problems before the vaccine is even close to being ready to distribute worldwide.
In our current situation now, it’s not even close to a guarantee that the economy and businesses can recover the way the market expects them to. And that doesn’t even include how much worse things could get in the short run, as more shutdowns are imposed to get control of the second wave.
Regardless of all this risk for a market crash, investors still can’t own only defensive stocks. As we’ve seen this year, diversification is key.
Owning only defensive stocks would have underperformed the markets considerably this year. At the same time, though, we can’t ignore defensive stocks, or our portfolios could be decimated in the short run.
TSX stocks to protect you from a market crash
If you need to add defence to your portfolio, one of the top stocks to buy today is F0rtis.
Fortis is a high-quality utility stock that’s perfect for protecting your hard-earned capital. You can count on the business to continue operating as normal through recessions. Furthermore, you can count on the dividend to continue to earn you passive income. Plus, the stock will also be a lot less volatile in a market crash.
Fortis’s diversified utility assets offer investors an extremely low-risk investment — one that will continue to increase the cash it’s paying out to investors. It’s the perfect defensive stock to add to your portfolio, but only if you need more defence.
It’s also crucial that investors have some exposure to high-quality growth stocks. Having exposure to high-potential growth stocks will be crucial in case the market rally continues.
At this point, the market has shown we should always be ready for anything. So, make sure your portfolio is well diversified.
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Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool recommends FORTIS INC.