It has been a historic season for Wall Street.
Even after the most thrilling rebound in history, the S&P 500 is barely out of bear market territory and is down 18% from its Feb. 19 peak.
Half of all stocks are still down 30% or more year to date (YTD). For index fund investors, it still feels like a market crash as airlines, oil and foreign banks have created an inexorable pull to the downside.
But my career has always revolved around going against the index. We weren’t in those stocks because I saw zero reason to park money in areas of the market that obviously weren’t going to do well.
Air travel has cratered. While the stocks will recover some day, the odds of a federal bailout wiping shareholders out are too high to tolerate right now.
Oil remains in a deeply defensive posture simply because people aren’t driving or flying. Even if the Saudis and Russians cut production, the basic supply situation is not going to change.
And as we gear up for a fresh round of Federal Reserve “stress tests” on the biggest U.S. banks, it is rapidly becoming clear that any repeat of the 2008 Lehman Brothers implosion is more likely to start overseas.
The Fed will make sure that our biggest financial institutions have the cash they need to survive. In countries like Spain and Italy, confidence that their banks will survive is not nearly as high.
Index funds can’t cut these stocks out of their automated portfolios, even when there’s no reason to go anywhere near that corner of the market until the businesses make sense again.
Simply steering clear of energy would have saved an S&P 500 investor a full 3 percentage points of downside YTD. It wouldn’t have been difficult either. Just screen out the sector and you would have beaten the market.
And once you have started down this road, you don’t need to settle for 3 percentage points of outperformance, either. That’s where real stock picking comes into play.
Fastest On the Rebound
Some stocks are already emerging on the other side of this pandemic. I’ll be talking about them in more depth on my radio show. I hope you’ll be listening. (Click here for recorded episodes and local stations.)
While they’ve taken a step back along with nearly everything else on Wall Street, they remain far more robust and reliable than the companies which we know will struggle in the months ahead.
Right now, I see a handful of stocks that wasted little time getting back to work. They still have significant ground to recover, but they’re in much better shape than the market as a whole.
And their success is contagious. When investors see the strength in these corners of the market, money will flow to create an even stronger shield against Wall Street’s wall of fear.
We don’t know anything about the world that most companies will face over the next few months. But we have a pretty good idea as to which corners of the economy will hold up best.
Those stocks are “only” in 10% correction territory, which is what we expect about once a year. Compared to a full-fledged bear market, they look mighty good.
They aren’t necessarily obscure or boring either. Amazon.com Inc. (NASDAQ:AMZN) is now only 7% from record territory and has held onto a 10% gain for the past 12 months.
The Jeff Bezos machine is as vibrant and essential as ever. This $1 trillion company is not going away any time soon. It’s the most defensive buy on the market today.
Then you have Walmart Inc. (NYSE:WMT) and Costco Wholesale Corp. (NASDAQ:COST). If Amazon can’t supply U.S. households through the pandemic and beyond, these big box retailers will pick up the slack.
They’re gigantic chains. And while they’re down a few percentage points from their respective peaks, they’re both up 25% over the last 12 months. That’s strength. That’s the persistent economy.
Add the stocks of the companies that provide the products these stores sell. Johnson & Johnson (NYSE:JNJ), Procter & Gamble Co. (NYSE:PG) and PepsiCo Inc. (NASDAQ:PEP) have made investors money over the past year and are still within 10% of their recent peaks.
If the pandemic couldn’t shake them for long, it’s going to take a complete apocalypse to make their shareholders unhappy. The only threat here is greed: When 8-11% returns aren’t enough, money flowed away from these slow but steady stocks.
Now it’s flowing back. That’s a classic clarion call for value stocks. My Value Authority subscribers have been booking actual wins while other investors are suffering.
They aren’t feeling the bear market. For them, this is just another correction in a long-term bull trend.
CANNABIS CORNER: RELIEF OR RALLY?
Big Cannabis had a great week, with most of the stocks on my screen rebounding 8-20%. But don’t get too excited yet. With the S&P 500 up 12% since March 3, those gains are really only in line with Wall Street as a whole.
These stocks are still battered. It has been a bad year for the industry as euphoric expectations have collided with the hard market reality.
I am reluctant to recommend the group until reality looks a little brighter. In the absence of a sudden increase in demand, that means resolving the lingering supply imbalance.
And that, in turn, means consolidation. We are going to need to see one or more of the weakest cannabis farmers suspend normal operations before the stronger names become interesting as long-term investments.
This week’s market activity tells me Hexo Corp. (NYSE:HEXO) might be the one that needs to go before Canopy Growth Corp. (NYSE:CGC) and the others get back to work.
It will happen. We simply need to remain disciplined and pick our positions carefully.