Last week again proved to be another week of good news / bad news, especially on the COVID front. First there was the great news of another highly effective vaccine, this time by Moderna followed by the bad news of continued exponential growth in COVID cases across the US and the world. Unemployment numbers last week weren't great (showing the first monthly increase in quite some time) and raising some concerns about a "double dip" recession, although housing continues to impress with continued price growth, short supply and strong demand driven by low interest rates, suburban migration and first time homebuyers. Also, homebuilder confidence is extremely high.
Indeed, the housing recovery has been a strong driver of the overall economy, not only favoring homebuilders, mortgage originators and other companies directly involved in residential real estate, but also retailers like Home Depot, Lowe's and Target all reporting strong earnings last week, but each with a different market reaction. All are essential retailers with a focus on the home, but there are some concerns (at least in the case of Lowe's and Home Depot) that the gains they have experienced during the pandemic may not be sustainable, while Target seems to be able to grow both online and in their physical stores and investors seem to believe that Target has the right formula for continued success post-pandemic. While some companies did quite well last week, the overall market sank, with all the major indices ending down on Friday.
With the dueling forces of short-term pessimism and longer term optimism, it's certainly difficult to decide what the best strategy is to navigate this turbulent market. Typically the period from Thanksgiving through New Year is strong for the stock market and this year should be no different, with potentially more more catalysts than normal including recovery in some industries, low interest rates, COVID vaccines on the way, election resolution and the hope for more fiscal stimulus to support pandemic recovery. That's a lot of tailwinds! Of course, the pandemic itself continues to be a strong headwind in the short term with many states rolling back reopening in response to case hikes, which seems to cause investors to flip between growth and value stocks on a daily basis. See my post last week for more of my thoughts on this topic.
On balance, it seems like a good time to be fully invested in the market with a bias toward long positions and buying quality companies on pull-backs. I like selling call options to collect the premium while holding the stocks - either way you make money on your holdings as long as you can patiently hold long-term to weather short-term dips. The market rally seems more likely than not to continue to broaden, especially favoring small caps and the beaten-down cyclical stocks, but I believe growth stocks will also continue to have a place in the portfolio, especially in a low interest rate environment and since they seem to do well in any economy.
Here's what I am currently holding:
I'm also looking to add Roku (ROKU) and Overstock (OSTK) positions next week.
The Financial Fortress approach would ensure that you are broadly diversified across asset classes and your stock trading portfolio should not be a large component of your overall financial picture, so even if you suffered heavy losses (which shouldn't happen if you are managing risk appropriately), the impact to your net worth should be minimal. The diversification in your stock trading portfolio need not include other asset classes like bonds or real estate, unless you don't have exposure to those areas in other parts of your Financial Fortress. I'm not recommending any particular stock or strategy.
I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2020. To see all my books on investing and leadership, click here.
Stay safe, healthy and positive.