COVID-19 has caused a bear market

With markets down by more than 30 per cent, we’re officially in a bear market. But a lower market lets you buy high-quality stocks that pay dividends and regularly raise them.

Wishful star gazers might look elsewhere for now. Companies that produce necessities should do better than most for the next while.

Stocks soared last year and into the start of 2020. True, stock valuations were high. The US and China, however, reached a ‘phase one’ trade truce. It was expected that company profits would jump and justify higher stock prices.

But then the coronavirus which causes COVID-19 erupted into a pandemic and made a recession much more likely. This has hurt stock prices, of course, despite significant ‘buy-the-dip’ rallies. With stock indices down more than 30 per cent from their recent peaks, we’re officially in a ‘bear’ (declining) market.

Those lower prices create attractive stock buying opportunities. Particularly for high-quality companies that regularly raise their dividends. Provided that you’re still building a stock portfolio—not withdrawing from the market—then the stock market setback lets you buy on the cheap.

Tourism and entertainment are down

As a result of this pandemic, the tourism and entertainment industries are suffering more than most. That’s because few people are willing to fly or cruise or sit in crowded theatres or stadiums. Canadians were advised to eliminate unnecessary travel. Then they were urged to cut short their March breaks abroad and return to Canada.

On The Back Page, we regularly review US Key stock The Walt Disney Company (NYSE—DIS). Since we published our October 25, 2019 issue, its shares have fallen by 21 per cent.

Disney’s theme parks, cruise lines and branded consumer products accounted for 37 per cent of its revenue in fiscal 2019 (fiscal years end on the Saturday nearest to September 30th). This revenue is certain to fall in fiscal 2020.

The Studio Entertainment division generated 15 per cent of last year’s revenue. But people aren’t going to theatres to see movies. On the positive side, Disney’s Media Networks division generated 35 per cent of its total 2019 revenue. Quarantined (and bored) people are apt to watch more TV and order more films from, say, National Geographic.

But, on balance, we’ve downgraded Disney to a hold for now. We believe that there are better opportunities elsewhere. Companies that produce or sell necessities, for instance, are likely to do better than most.

A recession is more likely

In our 2020 forecast, we didn’t see a recession coming. But we didn’t see a coronavirus pandemic coming either. Canada’s economy was initially expected to grow by 1.7 per cent in 2020. But the coronavirus has hurt the global economy.

China, the world’s second-largest economy, shut many factories to stop the spread of the coronavirus that causes COVID-19. This has damaged global supply chains. Italy, Europe’s fourth-largest economy, has shut down, particularly in the industrial North. Spain, Europe’s fifth-largest economy, is reeling. And the number of infections is rising sharply in Britain and France, Europe’s second- and third-largest economies, respectively.

Incredibly, few Americans have undergone tests. A big outbreak in the US will likely drive that country and the global economy into a recession. The situation keeps evolving.

This is an edited version of an article that was originally published for subscribers in the March 27, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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