The Perfect Vaccine for Market Volatility
The “reopening” trade is back!
Wait … what?
Wasn’t Wall Street’s reaction to last week’s election to find a comfortable spot on the couch and watch the “stay at home” trade roar back into full swing?
Well, it was…
Then came a weekend headline that Pfizer has a vaccine that’s 90% effective. And on Monday, value stocks shot right back up like they did when investors bet on a “blue wave” that would usher in big fiscal stimulus.
If it feels like a swift change in market leadership is taking place on a near daily basis, that’s because it is.
I warned in my Bauman Daily article last week that this would turn into a headline-driven market, where news reports drive wild swings in stock prices.
And that’s what we’ve seen. As you’ll see below, the constant back-and-forth between growth and value sectors has accelerated ferociously in recent days. You can expect that to continue.
That’s why our recent Bauman Daily commentary has focused on practical advice to overcome the volatility, including Ted’s three useful tips that he shared in his article yesterday.
To follow up on what Ted wrote this week, I have two specific investment recommendations.
But I also want to add an important piece of advice to Ted’s words of wisdom. It’s something you can follow now to make your stock market gains safer in a time of uncertainty.
Off the Richter Scale
Volatility has been high all year. It was highest when stocks cratered in March, as measured by the CBOE Volatility Index (^VIX).
That’s the most common way to gauge volatility. But despite the VIX’s historically high reading right now, we’re nowhere near March levels.
But one measure of uncertainty as to which stocks will be the next market leaders just shot off the Richter scale.
I looked at the spread in daily performance between two exchange traded funds (ETFs) for the past five years. I used the iShares Russell 1000 Value (NYSE: IWD) and the iShares Russell 1000 Growth (NYSE: IWF).
Of the 20 largest daily differences in performance, 18 have occurred in 2020. The top two have taken place just this past week. On Monday, IWD surged by 4.15% while IWF fell 1.72% … a spread nearly 1,265% higher than the daily average!
Win Amid the Market Mayhem
You can thrive as an investor in this environment. As I mentioned, Ted provided a handy checklist yesterday to navigate times like these.
I would add that discipline is key. More than just having a game plan (be smart), you need to stick to it (be tough).
It can be hard at times, but don’t get caught chasing today’s hot performers. There’s no guarantee they will be tomorrow’s winners.
Instead, focus on the process you have in place and invest in stocks that meet your criteria. We’re here to help you do that.
Ted and I identified two types of stocks that have helped our Bauman Letter model portfolio post strong gains this year:
- Deep Value. Not surprisingly, 2020 has offered many opportunities here. This is where panic becomes your chance to profit. Following the sell-off earlier this year, The Bauman Letter recommended an airline and a shopping center REIT.
- Secular Growth. These are stocks with long-term growth tailwinds driving huge gains in sales and profits. In The Bauman Letter, that includes sectors like renewable energy, online commerce, and digital payments.
Ted and I do the work to find companies best positioned to leverage secular growth trends, or mispriced value opportunities that are set to rebound.
You can also get broader exposure to these areas with ETFs, such as real estate with the Vanguard Real Estate ETF (NYSE: VNQ) or renewable energy with the iShares Global Clean Energy ETF (NYSE: ICLN).
Just remember to stay smart and tough, and stick to your game plan. Doing so will help you come out ahead … no matter the market’s mood today!
Research Analyst, The Bauman Letter