Following several weeks of questionable stock movements on Wall Street, it seems that the reality of recession has finally caught up with investors
Having just passed the 10,000 point mark, the Nasdaq (NYSEARCA: QQQ) fell straight back down again on Thursday, with the S&P 500 (NYSEARCA: VOO) and Dow (NYSEARCA: DIA) falling 5.9% and 6.9% respectively to give Wall Street its worst day since March.
As the Fed keeps interest rates close to 0% and reopened states reporting record numbers of infections, traders are getting jumpy. Weeks of piling into the likes of Southwest Airlines (NYSE: LUV) and a myriad of other struggling stocks before unceremoniously dumping them has created a perfect storm for a Wall Street crash similar to March’s disaster.
So why is this so dangerous right now, and what the hell are we going to do if there IS a second wave?
The danger of recent investor behavior
The coronavirus market has been a particularly dangerous one for investors, especially when looking at the unusual stock movement of struggling companies such as Hertz (NYSE: HTZ), Luckin Coffee (NASDAQ: LK), and Chesapeake Energy (NYSE: CHK). Luckin Coffee has been handed a delisting notice by the Nasdaq in recent weeks while Chesapeake is rumored to be filing for bankruptcy; and then there’s Hertz which has seen both. Despite all that, opportunistic traders have sent these companies’ share prices soaring — and subsequently falling due to pump-and-dump tactics.
It has also led to a “this is the next big thing” attitude, which, as highlighted by legendary investor Peter Lynch, is rarely the case. Lynch made a point of never going for a stock touted as the next IBM (NYSE: IBM) or McDonald’s (NYSE: MCD) etc. as there was simply too much hype and a danger of the stock becoming overvalued. This dangerous thinking has helped Nikola Corp (NASDAQ: NKLA) ride the Tesla (NASDAQ: TSLA) wave of success recently, leading to it becoming incredibly overpriced — it was briefly worth more than Ford (NYSE: F).
Such behavior is dangerous because, until now, it created a disparity between Wall Street and economic reality. The rise of easy-to-use and commission-free platforms appears to have emboldened traders, which has led to an upsurge in market volatility, as highlighted by the examples above.
What happens if there is a second wave?
It may be time for investors to accept that a second coronavirus wave is possible, and to invest accordingly.
The big takeaway from our 2020 experiences so far is that companies can adapt and new markets will always emerge. The likes of Zoom (NASDAQ: ZM), Slack (NYSE: WORK), and others have made it possible for the business world to move remote, in many cases without much issue. Then there are the stocks that investors have learned can survive a pandemic and even thrive, such as Netflix (NASDAQ: NFLX) and Peloton (NASDAQ: PTON).
That isn’t to say that another wave wouldn’t be devastating to others. It is still early days and we have not fully realized the extent of the damage done so far. The Fed is also printing money like it’s going out of business and offering close to 0% interest rates, so it remains to be seen what will result of this in the long run. Airlines and the travel industry are still in turmoil, meaning that they might be stocks to avoid at the moment.
However, there have been enough lessons from this downturn that investors should be able to protect against further similar situations.
How can I protect my portfolio?
Whatever uncertainty the market brings, one thing that we can be sure of is that, historically, it will continue to rise. Despite fears over a possible recession and future viruses, the surest way to protect your assets is by investing smart and diversifying your portfolio. You can get all the information you need to do so here at MyWallSt(r), including our 6 Golden Rules.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.