In today’s Exponential Investor

  • Here we go again…
  • Crisis and opportunity
  • Three war-ready stocks

Oh no, here we go again.

Déjà vu is setting in.

Just when we thought the worst was over, Covid-19 is serving another reminder that it’s not going anywhere, anytime soon.

The Omicron variant is upon us.

We don’t know yet how bad it is… or whether it’s maybe another way to drum up fear to motivate everyone to get their booster shots.

This news is reverberating throughout global stock markets, and striking more fear into investors than “transitory” inflation has so far.

On 26 November 2021, and over a 24-hour period, crude oil sunk 9%. The S&P was down 2.5%. The UK FTSE 100 was down 3.5%.

The losses aren’t enormous, but this could be the start of a difficult time for markets – especially in tandem with the anticipated correction covered in Kit Winder’s recent issue of Exponential Investor.

The CBOE Volatility Index (VIX), a measure of expected trading volatility, and a gauge of the level of fear in the US stock market, was upmore than 40% in a day.

With crisis comes opportunity

Does this panic seem familiar?

Amidst the stock market chaos, some may find a great deal of comfort.

Looking at the last time the market faced such fear, we have a fair idea how investors and the prices of stock might react.

In investing, past trends and patterns are a useful guide as to how current and future events could play out. It can, in a way, give us clues about where to position capital considering certain market conditions that may closely mirror previous events.

For example, whilst many stocks across the board when Omicron was announced were red, some were firmly in the green.

Which stocks? The lockdown darlings of 2020, of course.

Zoom Video Communications (NASDAQ:ZM), the video communications platform that allowed us to interact with each other during lockdown, was up 7.5%.

Peloton, the stay-at-home interactive fitness platform, was up 6.5% in 24 hours.

Ocado, the grocery home delivery retailer, up 5%.

Our point is this.

In every crisis, there is still always opportunity.

Stocks that have been battered during the post-pandemic recovery (like the ones above) suddenly look a lot more appealing on the thought of further lockdowns and restrictions.

Perhaps now is the time to look harder again at some of these stocks and diversify your portfolio away from pandemic recovery stocks and riskier assets that will not fare well during market downturns.

Or at least, if you’re sitting on some healthy gains from the last year and a half, consider trimming some of those wins if the market does head south.

This includes crypto-centric stocks, energy stocks, and travel stocks.

“Be greedy when others are fearful”

Another option is to seek refuge in more safe-haven assets.

What the market might consider “defensive” or non-cyclical stocks such as utilities or consumer staples could also become a viable option, as they usually stand firm when times are tough.

This includes companies like The Coca-Cola Company (NYSE: KO), Unilever Plc (NYSE: UL) and McDonald’s Corporation (NYSE: MCD) that will keep on selling regardless of what’s going on in the rest of the world. The bonus with companies like those is they also pay a dividend.

Even pharmaceuticals, which will no doubt come under the microscope again if a new vaccine is required, are worth looking at.

Another alternative includes gold, which is a strong hedge against volatile market conditions, and it is also a hedge against inflation.

Investors have a lot of options to mitigate tricky stock market conditions that could continue as this new strain of Covid advances.

And it could also bring the share prices of expensively priced companies down.

As investment guru Warren Buffett once said (when referring to the stock market):

“Be fearful when others are greedy, and greedy when others are fearful.”

Ask yourself, what will you be?

That’s not to say you should go and stick your life savings into cheap stocks. But you should be ready to be greedy if the fear level rises… opportunities presenting themselves during this (hopefully short lived) market downturn.

But if you’ve got some risk capital you’re not too concerned about, and your portfolio is already ready for war, some smaller, riskier punts aren’t a bad way to go either.

Elliott Playle
Junior Analyst, Southbank Investment Research