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  • Writer's pictureIshfaaq Peerally

Stock Market Correction - What's Next?

The most important news of the day is Joe Biden winning the most delegates from Super Tuesday. This gives some relief to Wall Street as a Bernie presidency seems unlikely now. The Fed yesterday decided to lower interest rates by 50 basis points. The markets open higher today with these two events. Our portfolio is up as well and I took some profits on our Facebook $FB trades.

Stock Market Correction - What's Next?

Last week was the worst week for the stock market in years. In just 6 days, the market $SPX500 went in a recession. This Monday, the Dow Jones gained 5% and the Fed announced that they are going to cut rates. These are not signs of recovery but that there are more volatile days ahead. There are two events causing these volatilities: the outbreak of the coronavirus and the coming US presidential elections with the possibility of Bernie Sanders (a Socialist) being the Democratic nominee.

We don't know for how the virus will be here or who will win the elections but we can be sure that the volatility will persists and as good investors, we need to ensure that our portfolio is prepared for it.

Since the start of the year, I've been telling you that you need to add some bonds in your portfolio as I was expecting volatilities but I was not expecting it to be that soon. Right now, I have about 20% of my portfolio in bonds namely in the TLT $TLT ETF, the IWF ETF and the TIP ETF. You also need gold $GOLD or a gold miner in your portfolio. For example, I have Polymetal International $$POLY.L in my portfolio. Bonds and gold will protect your portfolio from these volatilities. However, you need to be careful with bonds as there is a bubble in the corporate bond market and I will recommend on Treasury bonds. Also, don't invest in bonds for the yield. With such low yield, it is useless. Invest in bonds as an alternative to cash. You also need to diversify globally.

What's next? I won't suggest anyone investing in the whole market (in an index fund) as stocks are still expensive and they may fall further. It is better to look at stocks and companies individually. Look for opportunities in stocks that have low correlation with each other and with the rest of the market. For example, my investment in GameStop is uncorrelated with the market as there is a new console cycle and possibly a short squeeze regardless of what's happening elsewhere. Oil $OIL prices have been falling and it is a great time to look for great oil companies to invest in. Another example, is 5G. 5G is happening in the coming years. Look for some 5G stocks at a discount.

Let's now talk about Super Tuesday and the elections in general. Joe Biden won most delegates but there is still the probability of Mike Bloomberg or Bernie Sanders winning the nomination but it is most likely that Trump will win reelection in November. Whether, Trump, Bloomberg or Biden is president next year, the Wall Street will be happy about it but if Bernie Sanders win, it could lead to a bear market. This is unlikely but if it happens, it will be a great time to buy stocks. If Sanders win, most probably Congress will remain in the hands of the Republican and he won't be able to implement any of his socialist policies.

Ignore all the noises. Look for good businesses and buy them if they are cheap and make sure that you have other asset classes in your portfolio. As for how long this correction will last, nobody knows.

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