If You Must Stay Invested Before the Market Crash Comes, Consider These Sectors
Every investor has their own reasons for investing in the stock market. Capital appreciation is but one obvious goal. Many investors simply choose to take the “weather the storm” approach, or attempt to hedge by purchasing non-correlated market assets. Others refuse to hold large sums of cash in non-yielding assets like Guaranteed Investment Certificates (GICs). Whatever reasons investors may have for staying invested, we’ve put together a list of sector assets they might want to own in case a market crash strikes.
There may be no better time to act than today. Why? Because the market is very expensive. The widely followed CAPE ratio, which measures broad-market valuations better than just about any other metric, currently rests at 29.2. To put that in perspective, that figure is just shy of the “Black Tuesday” figure that kicked off the Great Depression (third-highest peak total in history). It’s only dwarfed by the Tech Bubble top, which had its own unique and historical circumstances.
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Even Wall Street money managers, who are generally incentivized to spread bull fairy dust, believe the market is expensive. For instance, legendary investor John Hussman expects the S&P 500 to return less than one percent over the next decade. Sooner rather than later, Hussman also expects a large haircut—perhaps as much as 60%—to unsuspecting market participants. More worryingly, Hussman’s model indicates the current market is more expensive than the one seen in 2007, and just five percent from the Tech Bubble of 2000. In case you’re wondering about track record, Hussman successfully called the market tops in 2000 and 2008. (Source: “Famed Investor Predicts Historic Market Drop,” Fortune, March 9, 2017.)
Still other analysts are unable to explain the current market rise among a stagnant earnings backdrop. Increasingly, “valuation expansion” is given as the reason for persistent market strength. Anything from Trump tax cuts to low interest rates to excess liquidity sloshing around through the system is used to support the new-normal melt-up price action.
Ultimately, the why doesn’t matter so much as the when. There is technically no “right” or “wrong” with the market. This is reflected in the old axiom: “The market is always right.” Even though certain conditions are favorable to this drip market rise we’ve been witnessing, these undercurrents could change violently without warning.
After such a monumental market move lasting almost a decade, most agree taking a defensive position in their portfolios could be a prudent strategy. If you’ve owned Amazon.com, Inc. (NASDAQ:AMZN) stock or other tech darlings during this period—congratulations! You’ve done very well. And there might be no inclination or reason to exit these positions anytime soon.
But for the more defensive investors concerned about an imminent or intermediate-term market event, portfolio rotation may be in mind.
If it is, they may want to think about these five sectors which should continue to do well in a tough economic climate.
Top 5 Sector Assets to Consider in a Market Crash
Precious Metals
This list wouldn’t be complete without precious metals—specifically gold. It is during periods of hardship that gold turns into a capital-appreciating machine. All you have to do is examine the price action of gold leading up to the four major crises of the past four decades: the 1973 Oil crisis (embargo), the 1980 Interest Rate crisis, the 2000 Tech Bubble, and the 2008 U.S. Housing Bubble. All led to a severe recession, and all led to periods where gold prices soared like they were being shot out of a cannon.
The reasons are not hard to decipher. Gold has a pristine track record of capital preservation, inflation hedge, and immutability immune to counterparty risk. If you own gold—specifically well-structured Exchange Traded Funds (ETFs) and physical gold itself—you never have to worry about a claim on ownership. This isn’t the case with many paper assets. It also helps that gold has about 8000 years of track record behind it. To put that in perspective, the Dow Jones Industrial Average (DJIA) has 132 years behind it. Just a slight discrepancy there.
There are more ways to buy gold bullion than ever before. This wasn’t the case 20 years ago. Today, investors can choose from an assortment of securely-structured ETFs, Exchange Traded Notes (ETNs), digital gold (BitGold), coins, or ingots. All will retain similar value, but the option of physical ownership is one advantageous aspect regular stocks don’t employ.
Whichever method of ownership investors choose, precious metals (including silver and platinum to varying degrees) will help protect their portfolio in rocky times. Chances are, they’ll run into asset appreciation similar or exceeding regular equities during a bull market run.
Marijuana
There’s a reason why vice stocks tend to do well in recessionary times: sales are robust. In such times, where people are stressed about their employment or worried about their futures, they tend to gravitate towards consumables that make them feel good. Alcohol and tobacco are the traditional sin staples, but marijuana has a real chance of supplanting them. Why? Marijuana possesses a key benefit the others don’t.
Unlike alcohol, which is a Central Nervous System (CNS) depressant, marijuana is used by many as a de facto off-label anti-depressant. So in theory, if the economy gets really bad, millions of people may end up turning to marijuana as a source of relief, as opposed to temporarily “drowning one’s sorrows” as they might with alcohol.
In other words, there’s an actual medical use case for consuming marijuana, which transcends the official “medical” use for dealing with physical pain and nausea. Of course, this doesn’t even include the known recreational aspects that people will likely crave—at least for a temporary reprieve on life.
Also keep in mind that as legalization continues to gain a foothold throughout North America, and the market matures and gains acceptance, the sector leaders are likely to generate steady, predictable cash flow. Many of the leaders might even start paying out dividends in time. Then there’s the potential for expanded off-label or clinical usages not recognized in the present. In other words, plenty of potential catalysts remain in the pipeline not seen in other traditional vice products.
But let’s not assume or get ahead of ourselves. At worst, marijuana presents another legitimate option to existing vice industries and has clear benefits the others don’t have. This should promote strong and reliable earnings growth in quality names even if the economy craters.
Cryptocurrencies
There is some wish-casting in calling cryptocurrencies a “safe-haven” asset this early since inception, but despite limited history, this is proving to be the case. Several times over the past half decade, leading cryptos like Bitcoin and Ethereum have appreciated sharply during a negative market event. There’s no mistaking a flight to quality has occurred in these names, which has traditionally manifested in assets like gold. This is beyond coincidence (in our humble opinion).
Nowhere has this been more evident than in Bitcoin’s May 2017 performance in the face of a deteriorating Chinese economy. Bitcoin started May 2017 at around $1,360/BTC, and as of this writing, has almost doubled to $2,580… in just 25 days. Meanwhile, the Shanghai Composite Stock Market Index has shed around 10% since mid-April 2017. Keep in mind that almost 50% of all Bitcoin transactions emanates from Chinese exchanges; a number that was over 80% as recently as early 2017 before the Chinese government imposed margin (trading) and marketing limits.
Even some of the biggest names on Wall Street have taken notice.
DoubleLine Capital (over $100.0 billion under management) CEO Jeff Gundlach provided a theory on Bitcoin’s rapid ascension. We think his tweet speaks for itself:
Bitcoin up 100% in under 2 months. Shanghai down almost 10% same timeframe, compared to most global stocks up. Probably not a coincidence!
— Jeffrey Gundlach (@TruthGundlach) May 23, 2017
Although speculation undoubtedly accounts for the biggest portion of Bitcoin’s explosive price action since 2011, there’s no question some of it is related to its perceived safe-haven qualities (immutable, subject to rigid supply etc.). These facts alone make cryptocurrencies a safeguard against the insidious effects of monetary inflation. Monetary debasement can only rise further in a world with $100.0 trillion of combined debt. This should make the leading & select cryptocurrency survivors hold their value in future market collapse where monetary inflation is the only response going forward.
Utilities
Historically the go-to asset class in economic downturns, they make our list as well. After all, homes and businesses still require electricity, gas, and running water during recessionary times. Thus, Utilities are seen as recession-proof by many in the investment community, due to the immutable quality of the services they provide. Consumers always find a way to pay utility bills, even when times get tough.
And while they do tend to outperform in recessionary times, it’s worth noting Utilities are not bulletproof. Consumers still use these services, but they will cut back when their financial security is threatened. They may tolerate a little less air conditioning during the hot months; they may be more inclined to throw on a sweater and dial the thermostat down in the winter; that 20-minute steaming hot shower may get downgraded to 12.
The point is not to steer investors away from Utilities, but to show that they are not indestructible during a market downturn. Individual investors will need to determine to what degree the “security” of Utilities is warranted for them.
Select Utility Performance Pre And Post U.S. Housing Bubble Recession
| Symbol | Utility/ETF | 10/9/2007 ($) | 3/9/2009 ($) | Loss (%) |
| ED | Consolidated Edison Inc. | 34.75 | 25.85 | -25.61 |
| SCG | SCANA Corp. | 28.83 | 20.69 | -28.23 |
| SO | Southern Company | 26.97 | 20.86 | -22.05 |
| NJR | New Jersey Resources Corp. | 26.67 | 25.23 | -5.40 |
| WEC | Wisconsin Energy Corp. | 18.91 | 15.51 | -17.98 |
| NU | Northeast Utilities | 23.14 | 16.10 | -30.42 |
| D | Dominion Resources Inc. | 33.55 | 21.87 | -34.81 |
| APU | AmericGas Partners LP | 22.45 | 16.37 | -27.08 |
| NEE | NextEra Energy Inc. | 50.09 | 34.50 | -31.12 |
| AEP | American Electric Power Co. | 35.42 | 18.93 | -46.58 |
Rental Companies
When the economy gets tough and people lose their jobs or pare back, they rent. Cheaper alternatives to owning tend to be quite popular as people look to save money in any way possible. Pay-as-you-go takes on newfound popularity. Renting goes hand-in-hand with people’s tendency to get more efficient with their resources. Since, by definition, renting involves paying for an asset during a specified and finite period. It is often more efficient than owning.
Another reason why rental company stocks do well in recessionary periods are the increase in foreclosures. When businesses and homeowners foreclose, they require things like storage lockers, transport vehicles, and rental units to live or store their stuff. Businesses which still operate tend to delay necessary CAPEX spending and rent or lease the equipment they need in the field. This drives down vacancy rates on all sorts of rental assets and gives these businesses pricing power (supply and demand concepts at play here).
While the stock market outlook may turn gloomy, these five assets could help safeguard an investor’s portfolio from destruction, should the big market crash hit.
