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13 April 2020
The stock market has been all over the place for the past seven weeks thanks to the shockwaves set off by the coronavirus – and it isn't likely to settle down anytime soon.
While stocks have been climbing in recent days, I predict that fear will return to the market as the full economic impact of the coronavirus comes to light. Fear means falling stock prices, and that means attractive opportunities for those who know where to look.
State and local governments around the country have taken extraordinary steps to get the coronavirus under control, including directing millions of people to stay home and closing non-essential businesses. That's sent shockwaves through a whole host of industries, from restaurants to car dealers to airlines and convention organizers.
It's a good bet that companies' earnings will be ugly for the next few quarters. Because of the unprecedented environment, many companies have actually stopped providing their traditional earnings guidance. That means investors who make bets based on expected earnings will be flying blind.
But you don't necessarily need to know what a company's earnings will be in the next quarter or two to know that it's worth investing in. The key is to think about the kinds of firms that are poised to thrive in a post-coronavirus world.
Technology is an obvious place to look. Companies like Apple will receive a big tailwind in the form of government stimulus money. Under the more than $2-trillion federal relief bill, the government is sending $300 billion in cash payments to individuals and $27 billion to schools. Schools are largely closed and have switched to long-distance learning. It stands to reason that a good chunk of that government relief money will be spent on on iPads and other technology that facilitates distance learning.
Meanwhile, enforced social isolation has taught more Americans to use online delivery, which could benefit companies from Amazon to UPS to MasterCard. Teleconferencing has expanded from being a business tool and become a way to have virtual coffee with friends and family around the country. That's great news for companies like Cisco and Adobe and, of course, Zoom Video Communications.
Banks, meanwhile, have been enlisted to distribute government money in the form of forgiveable loans to businesses. They will make money off those loans with very little risk because the federal government is guaranteeing the loans. That's a major tailwind, especially for strong institutions like JP Morgan.
That brings us back to market volatility. As first quarter earnings start to roll in next week, expect investors to turn gloomy. If we see a broad market selloff, there will be opportunities to buy great companies at very good prices.
It's important not to overreach. Stay away from companies that, while they may be in line for government help, have way too much debt and uncertain futures. That means avoiding the temptation to buy, for example ultra-cheap energy companies and airlines.
In other words, don't invest in the pre-coronavirus economy. Invest in the new economy and its potential winners. The key here is to enlist the help of an experienced professional who can methodically evaluate which specific stocks to buy, and when. Please don't hesitate to contact us if you'd like to discuss your investments.