The TSX today has bounced up and down as economic volatility continues. The Bank of Canada increased interest rates this summer, and is likely to do so again come September. So even though inflation may now be starting to get under control, Canadians still have a ways to go.
And that’s exactly why investors thinking we’ve hit a market bottom may want to think again.
The September effect
Practically every September, the market drops. This has been called the “September Effect” and it’s known for a number of reasons. Whether it’s people using cash to pay off summer vacation or their child’s education, finance managers coming back to work, or simply an anomaly, the result is the same. And this year, it looks even more likely.
In past years, the market has dipped potentially for these reasons of people getting back to work and paying off bills. However, this year we are in for another rate hike by the Bank of Canada. This is likely to cause investors to take out cash and choose not to invest to help pay for the effects of a rate hike.
So if you think we’ve hit a market bottom, think again. In 2021, there was a 3% drop in September on the TSX. In 2022, a 7% drop. So if it doubles once more, we could be in for a 15% drop in September, should the effect come into swing once more.
Don’t despair, prepare!
There are a few ways that you can prepare for a market drop. The best way is to start making your watchlist. Then, create some alerts through your banking institution at a desired percentage drop. That way, you can grab onto a deal as soon as it arrives.
And let me be clear: stick to those goals. Don’t sit around thinking you’re going to buy right at the market bottom. While another could be coming, see it as an opportunity, rather than an actual goal. Because planning to hit a market bottom is completely impossible. Anyone who actually hits it, does so completely by coincidence.
So now, let’s get into some sectors that you may want to identify for your watchlist.
Sectors to consider
Here at the Motley Fool, we tend to focus on long-term investing. For that, I would look to blue-chip companies that could drop, allowing for an opportunity to pick them up long term in a market drop. For this, I would look at stocks in the banking, energy, and infrastructure sectors.
For example, consider Brookfield Infrastructure Partners LP (TSX:BIP.UN). This infrastructure company has assets located all around the world, providing the infrastructure around everything from telecommunications to energy.
It also has the added bonus of a 4.54% dividend yield. So investors will bring in passive income while they wait for shares to recover. Shares are already down 16% in the last year, with interest rates hurting the company’s bottom line. Another drop and you could get this stock for a steal when holding long term.
So don’t wait! Start working on your watchlist today. It doesn’t have to be Brookfield stock, but investments in these sectors will certainly do well for your long-term portfolio. As long as you don’t try and time a market bottom.
