March 12, 2020

Coronavirus and the Stock Market

Coronavirus and the Stock Market

Financial markets move in cycles. If history is any indication, the market is set to bounce back and eventually make a full recovery.

While many on Wall Street see the current turmoil as an overreaction, others have begun to worry there’s no cure for what’s ailing stocks. So, what’s an investor to do? Read on to learn about how many shrewd investors are turning turmoil into opportunity.

It’s a rough time to be an investor. Panic is seizing investors worldwide as the coronavirus has sent global markets into a tailspin. One of Wall Street’s legendary economists who predicted the 2008 financial crisis says the stock market is behaving just like it did then.

Since the outbreak, all sorts of records have been broken, including the biggest single-day point drop in the Dow and the biggest weekly decline since 2008. 

Scary stuff, right? Well, it depends on who you ask.

Although there is no question that global growth and corporate earnings will be lower in the coming months, many believe that now is the best time to capitalise, especially at a time when the majority are either panicking, fleeing or both. 

Cashing in On Hysteria

A few S&P 500 stocks have not just resisted but rallied against the stock market’s massive sell-off since the beginning of the coronavirus outbreak. For example, shares of surgical mask makers have risen hundreds of per cent this week, as investors cash in on this amazing opportunity that emerged within the madness. Similar trends are also transpiring with brands like Clorox and Campbell Soup, dubbed by CNBC’s Mad Money host Jim Cramer as “stay-at-home environment stocks”. 

A Golden Opportunity?

The coronavirus is driving renewed interest in the market’s most sought-after safe haven: Gold. When there is uncertainty and challenging market conditions, investors tend to rush their investments from riskier assets to havens either to hedge against a stock market crash, protect against a looming catastrophe or to simply enjoy the fruits of a short-term price rally. 

For example, due to the global economic risk posed by the effects of the coronavirus, investors have diverted from investments in Oil. Consequently, as one would expect, Gold hit a 7-year high this week, while analysts are saying that the ‘level of fear in markets’ could push it all the way to $2,000.

Trading Potential Top Growth Stocks

Apple, Microsoft, and HP are among the many companies that have already warned that the COVID-19 outbreak will dent their short-term financial performance. But this has opened up an opportunity for savvy investors to buy top tech stocks at a time when most are selling.

The likes of Apple and NVIDIA are already looking attractive in light of the recent sell-off. What’s more, they could become more attractive if the downturn continues. 

Apple stock is now cheaper than it was earlier this year. Of course, Apple will face short-term headwinds because of the COVID-19 outbreak, but investors shouldn’t ignore the positives.

For instance, Apple’s manufacturing operations lie outside the Hubei province (from where the virus originated in Wuhan). Its supply chain is already back in action, as Apple pointed out that “all of these facilities have reopened and the production of Apple products in China should return to normal by the end of March.” Once production hits normal levels, Apple’s prospects should start looking up, as it is sitting on a tremendous opportunity in the form of 5G smartphones.

After NVIDIA stock’s terrific rally over the past year, the American technology company has to become more affordable as a result of the coronavirus-induced broader market sell-off.

The opportunity? After already being valued at around 70 times earnings in February, NVIDIA stock is now trading at around 58 times earnings, which many believe to be an attractive stock prospect.

Further stock price weakness could make the likes of Apple and NVIDIA’s stock cheaper, before regaining their mojo and becoming top growth stocks thanks to the catalysts they are sitting on.

Short Selling: Leveraging Falling Markets

As many investors know, corrections or especially a market crash can be highly beneficial for traders when correctly applying short selling strategies. Yahoo Finance has reported that investors targeting declines in U.S. stocks saw sizeable gains this week (“U.S. stock short-sellers notch $105 billion a week in coronavirus sell-off”).

In a nutshell, short selling allows one to profit from an anticipated decline in the price of an asset by taking a bearish position. Rather than buying low and selling high, the trader will sell high and buy low, then make a profit on the difference in the asset’s price.

Retail trading platforms such as AvaTrade allow traders to short sell stocks or indices via derivative instruments such as CFDs.

In Conclusion

Pandemics tend to curtail growth in the short term. Panics like the current are part and parcel of trading and investing. They come and go. Some of the fears turn out to be justified, as they were in 2008 and 2009, but that was a panic about the very fabric of the financial system. More usually, they end up like 2003’s SARS, forgotten and moved on from a few months later.

Financial markets move in cycles. As the saying goes “What goes up, must come down”. But the same goes for the opposite. If history is any indication, the market is set to bounce back and eventually make a full recovery. And while it may not happen overnight, whether short selling stocks in the upcoming week, switching to safe haven assets like Gold or snatching up soon to be top growth stocks, and as crazy as it may seem, the market is in fact currently bursting with opportunity.