COVID-19 continued its disruption of the stock market, with equities bouncing around once again as March drew to a close and April kicked off. The S&P 500 finished down by about 3.5%, while the S&P/TSX Composite Index rose by about 1.5%. Overall, the two markets are down by 25% and 27%, respectively, since February 21, when stocks began their freefall.
A lot of people are now considering whether or not to take any additional cash they have and put it into the market. Many of the fund managers I’ve spoken over the last couple of weeks are investing a bit here and there, but they are also being cautious as another decline could come, especially if the quarantine lasts longer than expected, if a vaccine doesn’t come in 12 to 18 months as expected or if more people die or get sick than predicted.
For those who want to buy some stock, dollar-cost averaging is a good approach. If you have, say, $12,000 earmarked for investing, put $1,000 into the market every month. If stocks fall again, then at least you’ve only lost a bit of that investment and then you get to buy again when stocks are lower. It will likely take a while for the market to rebound completely, so even if it does rise, you can still make money on the way up.
Perhaps the more important question right now is how should you buy in? What sectors might rebound faster than others? What sort of company fundamentals should you be paying attention to in a time like this?
Buying beaten-down asset classes
There’s an idea in investing that what goes down must come up. That’s especially applicable with certain asset class types, such as equities, bonds and gold. When an asset class has a bad year, it seems to rebound the next. For instance, in 2008, the S&P 500 fell by 36.9%; in 2009 it was up 25.9%. In 2008, the MSCI Emerging Market Index was down 52.2%, then went up 78% the following year. In 2015, the worst year for stocks since the Great Recession (at that point), the S&P 500 rose by just 1.4%; it was up 12% the next year.
In 2016, I wrote about this strategy of buying into bad asset classes in the hopes of making money off a rebound, and it’s appeared to hold true. (Though, a great year is often followed by a bad one.) It makes some sense: If you buy low and sell high, then a down or modest return year could signal a buying opportunity, while a strong year could suggest that it’s time to take profits, which would, in turn, cause an asset class to fall. Will the same happen this time? It’s hard to know given the depth of job losses and the devastating impact the crisis has had on the economy, but at some point these beaten down asset classes and indexes should rise again.
Stick to historically strong sectors
Every sector has taken a hit, though some have fallen less than others. U.S. energy stocks are down about 50% year-to-date, the most of any sector, while consumer staples have fallen the least, down about 12%. In Canada, our two main sectors, energy and financials, have fallen by about 40% and 30%, respectively.
The “what goes down must come up” theory doesn’t always work on a sector basis – Canadian energy stocks have underperformed for years – but you may want to take a look at historically strong-performing industries that have taken a hit over the last month.