Are you managing your portfolio properly to take advantage of the market?
Right now the market is crazy. It’s difficult to tell what will happen next, which makes it difficult to know where to go. But there are a few things that are for certain, and I’ll outline them here for any retail investor that happens to stumble upon this article.
1. Don’t buy COVID-19-related stocks.
Stop buying every little biotech that claims they’re working on a vaccine. According to the New York Times, there are “more than 155” vaccines currently in development. That’s a lot of companies, a lot of money, and a lot of chances to be wrong.
Yes, one of them will be the winner. Yes, someone will make a lot of money on it. Chances are it won’t be you, or the company you think it is. Furthermore, it will only be a small part of their income. The firms that really have a chance of getting this to market and producing enough to be viable already have large portfolios of products to sell – the income boost from a COVID-19 vaccine won’t be enough to have a big increase in EPS.
Part of the reason why is the political climate. Even now pharma companies are being blasted left and right over their drug prices – can you imagine the flak they’d take if they offered the COVID-19 vaccine at $3000+ a pop? Also keep in mind some pharma companies are saying they’ll offer it free of charge. And if the Democrats get a clean sweep in November you can be almost guaranteed they’ll be pushing the cost angle hard.
Basically, there isn’t much money in a vaccine or testing kits for COVID-19. It just isn’t a huge moneymaker for these large companies that already have extensive portfolios of drugs and other products. The PR value of offering it for free is worth it to them overcharging for it. Don’t chase these companies just for COVID-19-related reasons – you’ll end up losing.
2. FAANG stocks are hot – too hot to buy. Stay away.
Right now the FAANG stocks are sky high, and what goes up must come down – like we saw a couple days ago with Netflix (NASDAQ:NFLX). They’ve been pumped up during the market recovery (and good on you if you bought them near the bottom), but the earnings reports are going to humble the NASDAQ – and FAANG.
Netflix investors were brought to reality in a very rude fashion on Friday when the stock tanked after the earnings reports. A lot of people have bet on these stocks because they thought their use would go up during COVID-19 – and granted it has in some cases. The problem is sustained lockdowns, job losses, and inflation have to take their toll – and overbought high-flyers like the FAANG stocks will be first on the chopping block.
There are good choices in the tech space, but value is going to start outpacing growth as we switch into a new phase of the economy and inflation starts to rear its ugly head. Also consider the effect of another wave of COVID-19 and lockdowns – growth won’t do well at all, and you’ll be far better off away from the FAANG names. You can also be taking the opportunity to position your portfolio for an inevitable economic recovery by grabbing cyclical value stocks at their bottoms.
3. You need gold in your portfolio.
Gold is not typically exciting. But it sure has been this year, and it will continue to be. Consider the factors leading to a swing in gold prices. Generally they are fear, inflation, and strength of the dollar. What are we about to have?
The government just put us trillions more in debt, and is about to do it again. It’s called the HEROES Act, and congress will pass it shortly in some form – once they’re done arguing of course. Say what you want about the efficacy of such a bill and what it might do to the markets, the simple fact is that they must eventually monetize this debt and that will cause inflation.
When that inflation will hit is a great question. There’s much speculation that in the short term we will possibly see deflation, according to soon-to-be-published research.
But pandemics leave a traumatized population determined to save rather than spend, and a labor-capital ratio that has fallen to levels that undermine the incentive to invest. – Dario Perkins
In the short term, that’s very possible – but the long-term effects are impossible to forestall. With the US debt levels now reaching over $26T, and Congress on the cusp of passing yet another multi-trillion-dollar stimulus bill, a $30T debt level by the end of 2020 isn’t out of the question. The inflation will be felt, although it’s a question of when.
Right now gold has been on a tear. The reason for that is because investors see the writing on the wall. They see the incredible amount of debt levels, the possibilities of inflation, and they’re fearful. Take advantage of that and hedge your portfolio with gold. I’d recommend a 10% position, split between a decent gold miners ETF (like GDX), and “paper gold” like IAU. In my opinion, it will continue to rise for years.
Right now retail investors seem to be flocking to the wrong places – like COVID-19 stocks and the high-flying FAANG stocks. Like drugs, just say no (for right now). If you want the FAANG stocks, then wait for a pullback because a big one is coming. If you want a biotech that’s developing a COVID-19 vaccine, make sure you buy one worth owning if they completely fail at creating that particular drug – because they probably won’t be the ones to go to market. And lastly, go and buy some gold, because you’ll want it in the 2020s as the full effects of the pandemic become clear and start to be fully realized.
Disclosure: I am/we are long IAU, GDX, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.