How to Keep Your Grip During The Next Market Drop
My pleasure reading skews toward geeky fare. Last weekend, I threw some ancient Greek drama into my beach bag. A staple of these stories is the deus ex machina (god from the machine), a plot device whereby an apparently unsolvable problem is suddenly resolved by divine intervention.
Likewise, many people are expecting the coronavirus pandemic to get miraculously solved by the vaccine gods. However, chances of a COVID-19 vaccine reaching the public this year are slim. Don’t put your hopes on divine intervention via biotechnology.
Stocks have staged a remarkable comeback from their coronavirus-induced lows in late March, but the economy and by extension investors are approaching the edge of a cliff. Below, I’ll show you how to prepare your portfolio and retain your grip. This market still provides ample opportunities to make money, but you must pick your spots.
The three main U.S stock market indices closed mixed Tuesday, as a fractious Congress debated a new coronavirus stimulus bill. The Dow Jones Industrial Average gained 0.50% and the S&P 500 climbed 0.17%, but the NASDAQ Composite lost 0.81% due to a slump among Big Tech leaders. Silicon Valley “story stocks” took a breather from their long run-up.
In early trading Wednesday, the three main indices were modestly higher. Investors are optimistic that second-quarter earnings results from bellwether companies will prove better-than-feared.
The pandemic has plunged the U.S. economy into a recession and thrown millions of Americans out of work. In March, Congress passed the CARES Act, a $2 trillion stimulus package designed to keep individuals and businesses afloat with loans and payments. The goal was to buy the nation time to contain the virus, through social distancing and lockdowns. Once the curve was “flattened,” businesses could reopen.
It hasn’t worked out that way. As the great philosopher Mike Tyson once said: “Everyone has a plan, until they get punched in the mouth.”
The U.S. on average currently accounts for about a quarter of all new coronavirus cases reported worldwide every day. As of July 20, we’ve witnessed 202,420 new reported cases globally, with a 7-day average of 228,153 new cases (see chart).
As states and cities reopen, coronavirus cases are simultaneously soaring. Hospital ICUs are overwhelmed; makeshift morgues are sprouting up as death rates in several states hit new daily records. Many local governments are reversing course and returning to stringent quarantine rules. Consumers are tightening their purse-strings again and new economic data suggest that the tentative recovery is losing steam.
Many of the stimulus measures that kept American households from financially collapsing will soon expire. At the end of this month, the extra $600 per week of unemployment insurance benefits implemented under the CARES Act is set to run out, affecting 33 million workers.
States and localities face budgetary disaster and small businesses are going bankrupt in droves. Roughly 30% of Americans are missing their monthly housing payments. That’s not just a problem for renters and homeowners; that’s also a problem for landlords and banks.
As of this writing on Wednesday, the blended earnings decline for the S&P 500 is -44.0%, according to research firm FactSet. Blended combines actual results for companies that have reported and estimated results for companies that have yet to report.
However, stocks have rallied, reflecting the disconnect between Wall Street and Main Street. The Federal Reserve’s monetary stimulus has been lifting the equities of the large-cap stocks that comprise the major benchmarks. The Fed’s stimulus is unlimited. But in less than two weeks, fiscal stimulus runs out.
The CARES stimulus package help save our economy from total collapse. However, CARES was designed as an interim step, to keep households and businesses afloat during a comprehensive public health response. That response never fully materialized.
In recent days, Arizona, California, Florida, and Texas have closed parts of their economies again as coronavirus cases skyrocket. Other states have paused their reopening plans. Even in states where governors and mayors are ignoring the crisis, the public can’t ignore it, because it’s unfolding right in front of them. A stock market crash is a matter of when, not if.
Under these fraught conditions, you should focus on long-term investment trends that are unstoppable. One economic reality never fades: the growing need for utilities.
Utilities confer growth, safety and income, in good times or bad. When the daily news sometimes seems like a nightmare, utilities are a sleep-well-at-night sector.
Utility companies for gas, electric, water and other forms of power often operate under federal and state government regulations. Sure, this oversight can curtail the freedom of management’s decision-making, but it also acts as a barrier to entry in a vital market.
Protected from competitors, utilities can become entrenched as a dominant economic force in an entire community. That helps make utilities recession-resistant. Utilities also are buffers against the global trade war, because they derive zero revenue from China.
Where else is your money safe, growing and paying you income? Not in Treasury bonds. Their yields are at their lowest in history. Corporate bonds are riddled with default potential, CDs and money market funds barely keep up with inflation, and most stock sectors are poised for a correction.
Income investors covet the high dividends from utilities. These businesses tend to be stable, generating growing dividends and stock price appreciation over time. Utility stocks add ballast to a diversified portfolio.
The stock market is on course for a correction later this year, but utilities stocks should weather the storm. You don’t have to be Warren Buffett to figure out why: When you’re buying into a business that gets constant revenue from services people will never stop paying for, you’ve got a powerful tailwind at your back.
For our list of the best utilities stocks in America, click here.
John Persinos is editorial director of Investing Daily. He also edits the premium trading service, Utility Forecaster. You can reach him at: firstname.lastname@example.org