Just when the coronavirus stock market crash looked like it was all over, markets took another dive towards the end of last week.
US commentator Jim Cramer described the rally from the March lows as a “happiness trade”. But many investors have been worried for some time that there could be a second plunge in the stock market. It’s been hard to square the bullishness in the markets with the grim realities of what’s shaping up to be perhaps the worst recession in 100+ years.
There may not be a full-on second stock market crash
My view of what’s ‘right’ falls in the middle of the two extremes. I reckon the markets will likely settle somewhere between a second market crash at one end and the happiness rally at the other. After all, lockdowns are lifting and economic activity is picking up again. I also believe the experience governments have with the pandemic will help authorities keep a possible second upsurge of the disease in check.
Stock markets probably need to ride the brake for a while to curb the exuberance of investors. We could be seeing a correction that’s blowing off some of the speculative froth. But arguably, if you are in the market to accumulate shares for the long haul, buying conditions are good right now.
One of the main aims of investing for me is not to over-pay for shares. And there’s more chance of bagging what proves later to have been a bargain price if we buy when fear and worry are in the air. And sentiment certainly took a dive last week.
The alternative is to buy when the outlook is rosy. But when we do that, valuations are almost inevitably higher. And it’s possible to buy shares in great companies that go on to make poor investments because we paid too much in the first place.
It’s time to work hard with stock-picking
Now’s the time to focus on our watch lists. You’ve been building a watch list of companies that you’d like to invest in, right? If not, it’s time to roll up your sleeves and do some work. I’d do my own research and analyse companies, looking for strong finances, a decent trading record and evidence of a resilient trading niche in a strong sector.
To me, defensive, cash-generating companies are much better as long-term investments than more cyclical outfits. We can find some of these attractive beasts in sectors such as healthcare, fast-moving consumer goods, utilities, IT and technology among others.
In the FTSE 100, I’m keen on several companies that could make decent compounding machines in a long-term portfolio. For example, in fast-moving consumer goods, I’d focus on Diageo, Unilever and British American Tobacco. I like the look of National Grid and SSE in the energy sector. Sage is attractive in the IT and software space, and the healthcare sector has decent firms such as AstraZeneca, GlaxoSmithKline and Smith & Nephew.