Last week was hellish for investors.
For five straight days the market tanked over concerns about the COVID-19 pandemic.
By Friday afternoon, the S&P 500 had lost 10%. Last-minute buying by options traders hedging their bets before the weekend boosted stock prices a bit. So we ended up with a loss of “only” about 7%.
Even still, we are in “correction” territory — defined as a drop in the stock market of 10% or more from a previous high. The S&P 500 Index reached 3,381.16 on February 19. By midday yesterday, it remained more than 10% off that peak.
But unless you have all of your money invested in something like the SPDR S&P 500 ETF Trust (NYSE: SPY) that tracks the whole market, your positions probably experienced a wide variety of losses … even gains.
The fact is, certain types of assets are more vulnerable in a correction. You need to know which ones and why to help you weather a stormy stock market.
So I’ll spell it out for you, using my own portfolio as an example.
Knowledge Is Power
Like most people my age, I have a retirement portfolio. It’s a little on the aggressive side … I got a late start after years in the nonprofit sector earning a weak foreign currency.
But it can be divided into the same baskets as most people’s portfolios. There is a mixture of “factors” — criteria such as size, sector and the type of company and stock. It can also be broken down according to how long I’ve held various positions.
Using those criteria, here’s a summary of my winners and losers, as well as my take on why you’re probably experiencing similar performance in your own portfolio. (For obvious reasons, I’m not naming any names.)
- Big-cap technology companies: My Big Tech holdings fell hard and fast since mid-February and have recovered less than some other positions. That’s because they were already overvalued and due for big correction. Also, some of them are exposed to supply chain problems in Asia. Given that, they will probably be among the last to return to their previous highs. But I fully expect them to return to appropriate valuation. And since I’ve held them for a long time, I’m still comfortably in positive territory with them.
- Commodity companies: Companies that produce commodity products used in global industrial supply chains have also been hit hard. That includes both miners exposed to the automotive industry and companies that produce microchips for consumer electronics manufacturers. Their recovery has been slower than the market as investors wait to see whether East Asian economies can return to full capacity.
- Growth stocks: Companies with rapid price momentum over the last year have been slapped down hard. Most are in technology, producing either cloud software or components for the 5G rollout. Some had reached excessive valuations earlier this year, but mainly the market is punishing them because they aren’t profitable yet. These companies depend on rapid growth to maintain their popularity with investors. But those prospects are now unclear, at least for the short term. If the company is focused on the day after tomorrow, it’s likely to get crunched in circumstances like these.
- Stocks I bought recently: With a few exceptions, positions I added this year show the biggest percentage losses. There’s a simple reason, one that too many investors forget about: New positions haven’t had enough time to accumulate gains to cushion losses during a correction. That makes their relative performance appear worse than your other holdings. Of course, that has nothing to do with their long-term prospects, but many investors panic and sell them anyway.
- “Stay-at-home” companies: This is a new term to the stock market. It refers to companies likely to benefit from pandemic-related daily life disruptions. I’ve only bought one company in that category since the virus emerged, but I had a couple of others in my portfolio, focused on home energy management. At first, they dropped a bit. But they’ve rebounded faster than others.
- Companies that have reached value territory: Some companies exposed to global supply chain shocks thanks to COVID-19 saw a sharp rebound yesterday. That’s because investors recognize that they have excellent long-term prospects. And right now, they’re cheap. It’s the perfect time to buy.
- My hedges. Gold, safe-haven currencies and bonds have provided an essential counterweight during the last week or so. That’s why they’re in my portfolio … and that’s why they should be in yours, too.
Use Your Head and Stay Happy!
Breaking down my portfolio this way, really helps to give me perspective. Here’s how I’ll put that knowledge into action:
First, I won’t look at my portfolio every day. That’s one of the top habits of successful investors. What’s the point? Things move so quickly nowadays that it’s just going to make you nervous … and more likely to sell when you shouldn’t.
Second, I’ll wait to see what happens before I make any decisions — with one exception. I’m not going to sell or add to any positions until the global situation is clarified. Will the global economy face more travel and commercial restrictions? Will things get better soon? We just don’t know for sure. So the only trading I’m doing is among my hedging positions. Hedges that are strengthening, like gold, I’ll keep adding. Those that are wavering, like some currencies, I’ll let ride until I’m sure it’s time to make a move.
Third, I’ll rebalance quarterly, as I always do. At the end of this month, I reallocate my investments to maintain equal weighting. I’m not making any big moves until then. Any stocks that have done particularly well will be overweight, and I’ll take some profits on them. I’ll use those profits to buy more of companies that are underweight thanks to the virus. Any companies that look like they won’t recover soon, I’ll sell and cut my losses.
Unfortunately, pandemics are the new normal of the modern, globalized era. At least that’s what the experts say. So my plan is to keep using my head, develop appropriate insights and act accordingly.
That should be your plan too!
Editor, The Bauman Letter