Risk is back with a bang this week as the markets get a wake-up call. Investors likely spent the weekend wondering what just happened. Indeed, it was quite the end to the week, with a snap sell-off immediately followed by a whipsaw rally. We’ve seen this happen a few times during the pandemic, though, so the question is – can investors trust these kinds of rallies?
Avoid highly speculative plays as volatility mounts
The fact is that there is a dangerous disconnect at the moment between the markets and the economy. The markets are not reflecting the immense economic danger facing the world. Instead, waves of fear and greed are buffeting equities in equal measure.
No wonder, perhaps, that the needle on the CNN Fear and Greed Index is currently at “Neutral.” However, while the overall picture is one of business-as-usual, this neutral reading is in fact averaged across a number of wildly different readings. While the safe-haven barometer is pointing to “extreme greed,” for instance, the CBOE Volatility Index indicates that investors are in fact fearful of another market crash.
This fear was reflected in the TSX last week, which was overall negative by 3.7% despite Friday’s rally. It was a bad week for Canadian investors in every sector, and especially for companies reporting earnings. Monday saw the pain deepening, with Canada’s largest stock market down 1.6% at the open, making for a loss of 5% over the preceding five-day period.
Investors should now avoid high-risk sectors hit hardest by the outbreak, such as the embattled oil and aerospace sectors. The aerospace sector saw Bombardier and Chorus Aviation also dropped from the S&P/TSX Composite Index. The former stock has lost almost 20% in the last five days, with Chorus down 24%.
Bet on growth stocks but avoid overexposure
For a while it looked as though aviation stocks might pull through. Indeed, the thesis for holding only the biggest airlines may yet work out for long-term contrarians. However, with the markets awash with risk, growth investors should be prepared to shell out for more expensive names that pack quality with a compelling thematic.
If investors are keen to pack retail exposure in a portfolio, a smart play for long-term capital gains exists in Shopify. This top-tier tech stock has performed well during the pandemic, driven by a market seeking solutions to profound changes in consumer habits. Digitalization is fast becoming one of the major thematics of the new decade, with names like Kinaxis outperforming in the supply chain automation space.
Meanwhile, green energy remains one of the strongest growth areas on the TSX. This area is especially rewarding, bringing a mix of low market ratios and rich dividend yields.
Renewable energy stocks like Northland Power are beginning to be repositioned as viable alternatives to hydrocarbon names.
As such, the best green energy dividend stocks make a sustainable addition to a risk-reduced portfolio built around long-term financial goals.