Two fears are fighting each other in many investors' minds right now. There's a battle between the fear of the stock market plunging again versus the fear of missing out if it doesn't.
It was less than two months ago that the stock market tanked, resulting in the first bear market in more than a decade. But then many stocks began to rebound sharply. Some even make the case that another bull market is now beginning.
Will the stock market crash again or keep rising? Here's what to do either way.
What drives the stock market
It's important to understand that the primary driver of the stock market is investors' views about the future. This explains why the major stock indexes have risen significantly over the last few weeks while the news about the economy and COVID-19 outbreak were increasingly gloomier.
Most investors are aware of all the bad news. They're not ignoring it. Instead, many seem to think that the worst of the coronavirus crisis will soon be over and that the economy will rebound relatively quickly. The passage of the $2.2 trillion CARES Act and the efforts by the Federal Reserve Board to prop up the U.S. economy have reinforced these views.
Is this optimism warranted? It's a definite maybe.
Investors are right to believe that things will get better. They will. However, no one knows for sure how long it will take before the economy is fully back on track. Expectations that businesses will soon reopen, Americans will regain their jobs quickly, and that life will pretty much return to normal within the next few months could be unrealistic.
There's a real possibility that some areas will continue to experience rising COVID-19 cases and deaths. Government officials will be reluctant to lift shelter-in-place orders in these areas. Even if an all-clear is given across the country to return to business as usual, it's unlikely that business will really be as usual. Many people will still be reluctant to travel and be around a lot of other people because of concerns that they could be infected with the novel coronavirus.
Some healthcare experts warn that there could be another major outbreak in the fall. It's possible that life could return to a semblance of normalcy only temporarily before reverting to how things are now.
I say all this not to be pessimistic but simply to point out that investors' current positive sentiment could easily sour. If it does, the stock market just might crash again.
What to do regardless
While you can't know what direction the stock market will move in the near term, the good news is that you don't have to. Regardless of whether the stock market soars or sinks, there's a smart approach to take either way.
First, make sure you have an emergency fund built up. Buying stocks isn't advisable if you're vulnerable financially. Once you've covered this base, you're ready to invest. Yes, invest in stocks no matter what happens with the stock market.
The reality is that the only way you're going to time the market is to get lucky. Relying on luck for success isn't investing; it's gambling. So don't try to time the market. Instead, time your investments to improve your chances of long-term success.
What I mean by that is don't invest all of your cash at once. Buy stocks incrementally over time, perhaps once every week or two or once per month. Ease into your positions. One way to do this is to buy a stock in equal amounts on three different days. Another idea is to use a "pyramid" approach -- buy half of your targeted position, followed later by buying another 30%, then followed by buying the final 20%.
What kinds of stocks to buy
The specific kinds of stocks that you buy will depend on your investment objectives and your risk tolerance. Some investors will be more attracted to dividend stocks. Others might prefer to buy stocks with tremendous growth prospects that don't pay dividends.
I think that for many investors a good strategy is to invest in three categories of stocks:
- Blue-chip stocks that are built to weather economic storms well.
- Beaten-down stocks that should rebound in a big way once the COVID-19 crisis and its aftermath are over.
- Stocks that actually benefit from the coronavirus pandemic.
There are plenty of examples of all three categories, but I'll mention one stock for each category that I like.
Abbott Labs (NYSE:ABT) stands out as one of my favorite blue-chip stocks. Fortune has ranked Abbott on its list of Most Admired Companies every year since 1984 and No. 1 among medical products companies since 2014.
Income-seeking investors will probably love Abbott's track record of paying a dividend every quarter for 96 consecutive years and increasing its dividend every year for the last 48 years in a row. The company has excellent growth prospects with products including its Freestyle Libre continuous glucose monitoring (CGM) system and Alinity diagnostics systems leading the way. Abbott also has launched several COVID-19 diagnostics tests that should enjoy strong demand.
Square (NYSE:SQ) is a great example of a stock that's beaten down now but should be a big winner over the long run. The company is best known for its card readers, but Square offers a full-blown platform for small and medium-sized businesses. It's also a major player in the peer-to-peer payments arena with its Cash App.
Square will feel the pain from the effects of the COVID-19 outbreak in the near term. But there's a major long-term trend under way where consumers are switching from physical forms of payment such as cash and checks to electronic payments. Square is set to profit from this trend.
What about a stock that benefits from the coronavirus pandemic? Check out Teladoc Health (NYSE:TDOC). Shares of the top telehealth services provider have more than doubled so far this year. Teladoc's virtual care visit volume has surged so much that the company boosted its first-quarter revenue outlook.
I don't think the attraction for telehealth will fade away after the COVID-19 worries are over, though. Telehealth is convenient for patients and cost-effective for payers. Teladoc is only scratching the surface of its market potential right now. This is a great stock to buy regardless of what happens with the overall market.